Take Two Interactive Software Inc 10-Q for FY2024 Q3
Take Two Interactive Software Inc (TTWO)
10-Q
2024-02-09
For: 2023-12-31
View Original
Added on
April 09, 2026
About this 10-Q
Take Two Interactive Software Inc filed this 10-Q on February 9, 2024, covering the quarter ended December 31, 2023 (FY2024 Q3).
Headline figures
Quarter ended December 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.37B
- down 2.9% from $1.41B a year earlier
- Net loss
- $91.6M
- compared with a net loss of $153.4M a year earlier
- Diluted EPS
- -$0.54
- compared with -$0.91 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended December 31, 2023
| OR | |||||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
| For the transition period from to . | |||||
Commission file number 001-34003
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Zip Code) | |||||||||||
| (Address of principal executive offices) | |||||||||||
Registrant's Telephone Number, Including Area Code: (646 ) 536-2842
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ý | Accelerated filer | o | Non-accelerated filer | o | Smaller reporting company | Emerging growth company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
As of January 29, 2024, there were 170,586,411 shares of the Registrant's Common Stock outstanding, net of treasury stock.
INDEX
(All other items in this report are inapplicable)
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TAKE-TWO INTERACTIVE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)
See accompanying Notes.
| December 31, 2023 | March 31, 2023 | |||||||||||||
| (Unaudited) | ||||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Short-term investments | ||||||||||||||
| Restricted cash and cash equivalents | ||||||||||||||
Accounts receivable, net of allowances of $ | ||||||||||||||
| Software development costs and licenses | ||||||||||||||
| Contract assets | ||||||||||||||
| Prepaid expenses and other | ||||||||||||||
| Total current assets | ||||||||||||||
| Fixed assets, net | ||||||||||||||
| Right-of-use assets | ||||||||||||||
| Software development costs and licenses, net of current portion | ||||||||||||||
| Goodwill | ||||||||||||||
| Other intangibles, net | ||||||||||||||
| Deferred tax assets | ||||||||||||||
| Long-term restricted cash and cash equivalents | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued expenses and other current liabilities | ||||||||||||||
| Deferred revenue | ||||||||||||||
| Lease liabilities | ||||||||||||||
| Short-term debt, net | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt, net | ||||||||||||||
| Non-current deferred revenue | ||||||||||||||
| Non-current lease liabilities | ||||||||||||||
| Non-current software development royalties | ||||||||||||||
| Deferred tax liabilities, net | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Total liabilities | $ | $ | ||||||||||||
| Stockholders' equity: | ||||||||||||||
Preferred stock, $ | ||||||||||||||
Common stock, $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
Treasury stock, at cost; | ( | ( | ||||||||||||
| Retained earnings | ||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
| Total stockholders' equity | $ | $ | ||||||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||||||||
2
TAKE-TWO INTERACTIVE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in millions, except per share amounts)
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Net revenue: | ||||||||||||||||||||||||||
| Game | $ | $ | $ | $ | ||||||||||||||||||||||
| Advertising | ||||||||||||||||||||||||||
| Total net revenue | ||||||||||||||||||||||||||
| Cost of revenue | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
| Selling and marketing | ||||||||||||||||||||||||||
| Research and development | ||||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||
| Goodwill impairment | ||||||||||||||||||||||||||
| Total operating expenses | ||||||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | ||||||||||||||||||||||
| Interest and other, net | ( | ( | ( | ( | ||||||||||||||||||||||
| (Loss) gain on fair value adjustments, net | ( | ( | ( | |||||||||||||||||||||||
| Loss before income taxes | ( | ( | ( | ( | ||||||||||||||||||||||
| Benefit from income taxes | ||||||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Loss per share: | ||||||||||||||||||||||||||
| Basic and diluted loss per share | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
See accompanying Notes.
3
TAKE-TWO INTERACTIVE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(in millions)
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Other comprehensive income (loss) | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | $ | ( | ||||||||||||||||||||||||
| Change in fair value of available for sale securities | $ | |||||||||||||||||||||||||
| Other comprehensive income (loss) | $ | ( | ||||||||||||||||||||||||
| Comprehensive income (loss) | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
See accompanying Notes.
4
TAKE-TWO INTERACTIVE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
| Nine Months Ended December 31, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Operating activities: | ||||||||||||||
| Net loss | $ | ( | $ | ( | ||||||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||||
| Amortization and impairment of software development costs and licenses | ||||||||||||||
| Stock-based compensation | ||||||||||||||
| Noncash lease expense | ||||||||||||||
| Amortization and impairment of intangibles | ||||||||||||||
| Depreciation | ||||||||||||||
| Goodwill impairment | ||||||||||||||
| Interest expense | ||||||||||||||
| Gain on debt extinguishment | ( | |||||||||||||
| Fair value adjustments | ||||||||||||||
| Other, net | ( | |||||||||||||
| Changes in assets and liabilities, net of effect from purchases of businesses: | ||||||||||||||
| Accounts receivable | ||||||||||||||
| Software development costs and licenses | ( | ( | ||||||||||||
| Prepaid expenses and other current and other non-current assets | ( | ( | ||||||||||||
| Deferred revenue | ( | |||||||||||||
| Accounts payable, accrued expenses and other liabilities | ( | ( | ||||||||||||
| Net cash (used in) provided by operating activities | ( | |||||||||||||
| Investing activities: | ||||||||||||||
| Change in bank time deposits | ||||||||||||||
| Sale and maturities of available-for-sale securities | ||||||||||||||
| Purchases of fixed assets | ( | ( | ||||||||||||
| Proceeds from sale of long-term investment | ||||||||||||||
| Purchases of long-term investments | ( | ( | ||||||||||||
| Business acquisitions | ( | ( | ||||||||||||
| Other | ( | ( | ||||||||||||
| Net cash provided by (used in) investing activities | ( | |||||||||||||
| Financing activities: | ||||||||||||||
| Tax payment related to net share settlements on restricted stock awards | ( | ( | ||||||||||||
| Issuance of common stock | ||||||||||||||
| Payment for settlement of convertible notes | ( | |||||||||||||
| Proceeds from issuance of debt | ||||||||||||||
| Cost of debt | ( | ( | ||||||||||||
| Settlement of capped calls | ||||||||||||||
| Repayment of debt | ( | ( | ||||||||||||
| Payment of contingent earn-out consideration | ( | ( | ||||||||||||
| Net cash (used in) provided by financing activities | ( | |||||||||||||
| Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash and cash equivalents | ( | |||||||||||||
| Net change in cash, cash equivalents, and restricted cash and cash equivalents | ( | ( | ||||||||||||
Cash, cash equivalents, and restricted cash and cash equivalents, beginning of year (1) | ||||||||||||||
Cash, cash equivalents, and restricted cash and cash equivalents, end of period (1) | $ | $ | ||||||||||||
(1) Cash, cash equivalents and restricted cash and cash equivalents shown on our Condensed Consolidated Statements of Cash Flow includes amounts in the Cash and cash equivalents, Restricted cash and cash equivalents, and Long-term restricted cash and cash equivalents on our Condensed Consolidated Balance Sheet.
5
TAKE-TWO INTERACTIVE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
(in millions)
| Three Months Ended December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholder's Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized gain on available-for-sale securities, net of tax | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures and cancellations | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Net share settlement of restricted stock awards | ( | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Employee share purchase plan settlement | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
| Three Months Ended December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholder's Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized gain on available-for-sale securities, net of taxes | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures and cancellations | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Net share settlement of restricted stock awards | ( | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares related to Popcore acquisition | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation assumed in Zynga Acquisition | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Employee share purchase plan settlement | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
See accompanying Notes.
6
| Nine Months Ended December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net unrealized gain on available-for-sale securities, net of taxes | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures and cancellations | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net share settlement of restricted stock awards | ( | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Employee share purchase plan settlement | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
| Nine Months Ended December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Change in cumulative foreign currency translation adjustment | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Net unrealized gain on available-for-sale securities, net of taxes | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures and cancellations | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Net share settlement of restricted stock awards | ( | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Employee share purchase plan settlement | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares related to Zynga Acquisition | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation assumed in Zynga Acquisition | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares related to Popcore acquisition | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares for conversion of Convertible Notes | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||
See accompanying Notes.
7
TAKE-TWO INTERACTIVE SOFTWARE, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(in millions, except per share amounts)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Take-Two Interactive Software, Inc. (the "Company," "we," "us," or similar pronouns) was incorporated in the state of Delaware in 1993. We are a leading developer, publisher, and marketer of interactive entertainment for consumers around the globe. We develop and publish products principally through Rockstar Games, 2K, Private Division, and Zynga. Our products are designed for console gaming systems, PC, and mobile, including smartphones and tablets. We deliver our products through physical retail, digital download, online platforms, and cloud streaming services.
Acquisition of Zynga
On May 23, 2022, we completed our acquisition of 100 % of the issued and outstanding shares of Zynga Inc. ("Zynga"), a leading developer of mobile games (the "Zynga Acquisition"). Refer to Note 13 - Acquisitions for additional information.
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements are unaudited and include the accounts of the Company and its wholly-owned subsidiaries and, in our opinion, reflect all normal and recurring adjustments necessary for the fair presentation of our financial position, results of operations, and cash flows. Interim results may not be indicative of the results that may be expected for the full fiscal year. All intercompany accounts and transactions have been eliminated in consolidation. The preparation of these Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") requires management to make estimates and assumptions that affect the amounts reported in these Condensed Consolidated Financial Statements and accompanying notes. As permitted under U.S. GAAP, interim accounting for certain expenses, including income taxes, is based on full year assumptions when appropriate. Actual results could differ materially from those estimates, which may affect economic conditions in a number of different ways and result in uncertainty and risk.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), although we believe that the disclosures are adequate to make the information presented not misleading. These Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with our annual Consolidated Financial Statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.
Certain immaterial reclassifications have been made to prior period amounts to conform to the current period presentation.
Recent Accounting Pronouncements
Accounting for Income Taxes
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which expands disclosures in an entity’s income tax rate reconciliation table and regarding cash taxes paid both in the U.S. and foreign jurisdictions. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 (April 1, 2025 for the Company). The amendments in this ASU are required to be applied on a prospective basis and retrospective adoption is permitted. We are currently evaluating the potential impact of adopting this guidance on our Consolidated Financial Statements and related disclosures.
Accounting for Segment Reporting
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which updates reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 (April 1, 2024 for the Company). The amendments in this ASU must be applied on a retrospective basis to all prior periods presented in the financial statements. We are currently evaluating the potential impact of adopting this guidance on our Consolidated Financial Statements and related disclosures.
8
2. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue
Timing of recognition
Net revenue recognized at a point in time is primarily comprised of the portion of revenue from software products that is recognized when the customer takes control of the product (i.e. upon delivery of the software product).
Net revenue recognized over time is primarily comprised of revenue from our software products that include game related services, separate virtual currency transactions, and in-game purchases, which are recognized over an estimated service period. Net revenue recognized over time also includes in-game advertising, which is recognized over a contractual term.
Net revenue by timing of recognition was as follows:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Net revenue recognized: | ||||||||||||||||||||||||||
| Over time | $ | $ | $ | $ | ||||||||||||||||||||||
| Point in time | ||||||||||||||||||||||||||
| Total net revenue | $ | $ | $ | $ | ||||||||||||||||||||||
Content
Recurrent consumer spending ("RCS") is generated from ongoing consumer engagement and includes revenue from virtual currency, add-on content, in-game purchases, and in-game advertising.
Full game and other revenue primarily includes the initial sale of full game software products, which may include offline and/or significant game related services.
Net revenue by content was as follows:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Net revenue recognized: | ||||||||||||||||||||||||||
| Recurrent consumer spending | $ | $ | $ | $ | ||||||||||||||||||||||
| Full game and other | ||||||||||||||||||||||||||
| Total net revenue | $ | $ | $ | $ | ||||||||||||||||||||||
Geography
We attribute net revenue to geographic regions based on software product destination. Net revenue by geographic region was as follows:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Net revenue recognized: | ||||||||||||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||||||||||||
| International | ||||||||||||||||||||||||||
| Total net revenue | $ | $ | $ | $ | ||||||||||||||||||||||
9
Platform
Net revenue by platform was as follows:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Net revenue recognized: | ||||||||||||||||||||||||||
| Mobile | $ | $ | $ | $ | ||||||||||||||||||||||
| Console | ||||||||||||||||||||||||||
| PC and other | ||||||||||||||||||||||||||
| Total net revenue | $ | $ | $ | $ | ||||||||||||||||||||||
Distribution Channel
Our products are delivered through digital online services (digital download, online platforms, and cloud streaming) and physical retail and other. Net revenue by distribution channel was as follows:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Net revenue recognized: | ||||||||||||||||||||||||||
| Digital online | $ | $ | $ | $ | ||||||||||||||||||||||
| Physical retail and other | ||||||||||||||||||||||||||
| Total net revenue | $ | $ | $ | $ | ||||||||||||||||||||||
Deferred Revenue
We record deferred revenue when payments are due or received in advance of the fulfillment of our associated performance obligations. The balance of deferred revenue, including current and non-current balances as of December 31, 2023 and March 31, 2023 were $1,142.5 and $1,114.3 , respectively. For the nine months ended December 31, 2023, the additions to our deferred revenue balance were due primarily to cash payments received or due in advance of satisfying our performance obligations, while the reductions to our deferred revenue balance were due primarily to the recognition of revenue upon fulfillment of our performance obligations, both of which were in the ordinary course of business.
During the three months ended December 31, 2023 and 2022, $153.7 and $115.6 , respectively, of revenue was recognized that was included in the deferred revenue balance at the beginning of the respective period. During the nine months ended December 31, 2023 and 2022, $991.8 and $814.5 , respectively, of revenue was recognized that was included in the deferred revenue balance at the beginning of the respective period. As of December 31, 2023, the aggregate amount of contract revenue allocated to unsatisfied performance obligations is $1,248.5 , which includes our deferred revenue balances and amounts to be invoiced and recognized as revenue in future periods. We expect to recognize approximately $1,159.0 of this balance as revenue over the next 12 months, and the remainder thereafter. This balance does not include an estimate for variable consideration arising from sales-based royalty license revenue in excess of the contractual minimum guarantee.
As of December 31, 2023 and March 31, 2023, our contract asset balances were $88.7 and $79.9 , respectively.
3. MANAGEMENT AGREEMENT
In November 2017, we entered into a management agreement (the "2017 Management Agreement") with ZelnickMedia Corporation ("ZelnickMedia") that replaced our previous agreement with ZelnickMedia and pursuant to which ZelnickMedia was to provide financial and management consulting services to the Company through March 31, 2024. The 2017 Management Agreement became effective January 1, 2018. As part of the 2017 Management Agreement, Strauss Zelnick, the President of ZelnickMedia, continued to serve as Executive Chairman and Chief Executive Officer of the Company, and Karl Slatoff, a partner of ZelnickMedia, continued to serve as President of the Company. The 2017 Management Agreement provided for an annual management fee of $3.1 over the term of the agreement and a maximum annual bonus opportunity of $7.4 over the term of the agreement, based on the Company achieving certain performance thresholds.
In May 2022, we entered into a new management agreement (the "2022 Management Agreement") with ZelnickMedia that replaced the 2017 Management Agreement and pursuant to which ZelnickMedia will continue to provide financial and management consulting services to the Company through March 31, 2029. The 2022 Management Agreement became effective on May 23, 2022, when our acquisition of Zynga closed (refer to Note 13 - Acquisitions). On May 21, 2022, ZelnickMedia
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assigned substantially all of its rights and obligations and other liabilities under the 2022 Management Agreement to ZMC Advisors, L.P. ("ZMC Advisors"). References to "ZMC" herein shall mean either ZelnickMedia or ZMC Advisors, as appropriate. As part of the 2022 Management Agreement, Strauss Zelnick continues to serve as Executive Chairman and Chief Executive Officer of the Company, and Karl Slatoff continues to serve as President of the Company. The 2022 Management Agreement provides for an annual management fee of $3.3 over the term of the agreement and a maximum annual bonus opportunity of $13.2 over the term of the agreement, based on the Company achieving certain performance thresholds. In connection with the 2022 Management Agreement, we have and expect to grant time-based and performance-based restricted units to ZMC.
In consideration for ZMC's services, we recorded consulting expense in General and administrative expenses on our Condensed Consolidated Statements of Operations of $(0.7 ) and $(0.6 ) during the three months ended December 31, 2023 and 2022, respectively, and $4.5 and $3.3 during the nine months ended December 31, 2023 and 2022, respectively. We recorded stock-based compensation expense for restricted stock units granted to ZMC, which is also included in General and administrative expenses, of $14.0 and $12.9 during the three months ended December 31, 2023 and 2022, respectively, and $39.1 and $34.4 during the nine months ended December 31, 2023 and 2022, respectively.
In connection with the 2022 Management Agreement and 2017 Management Agreement, we have granted restricted stock units (in thousands) to ZMC as follows:
| Nine Months Ended December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Time-based | |||||||||||
Market-based(1) | |||||||||||
Performance-based(1) | |||||||||||
| IP | |||||||||||
| RCS | |||||||||||
| Total Performance-based | |||||||||||
| Total Restricted Stock Units | |||||||||||
(1) Represents the maximum of shares eligible to vest
Time-based restricted stock units granted pursuant to the 2022 Management Agreement in fiscal year 2024 will vest on June 1, 2024, June 1, 2025, and June 1, 2026, and those granted in fiscal year 2023, partially vested on June 1, 2023 and will also vest June 1, 2024, and June 1, 2025. Time-based restricted stock units granted in fiscal year 2023 pursuant to the 2017 Management Agreement will vest on April 13, 2024.
Market-based restricted stock units granted pursuant to the 2022 Management Agreement in fiscal year 2024 are eligible to vest on June 1, 2026, and those granted in fiscal year 2023 are eligible to vest on June 1, 2024 and June 1, 2025. Market-based restricted stock units granted in fiscal year 2023 pursuant to the 2017 Management Agreement are eligible to vest on April 13, 2024. Market-based restricted stock units are eligible to vest based on the Company's Total Shareholder Return (as defined in the relevant grant agreement) relative to the Total Shareholder Return (as defined in the relevant grant agreement) of the companies that constitute either the NASDAQ Composite Index under the 2017 Management Agreement or the NASDAQ 100 index under the 2022 Management Agreement (as defined in the relevant grant agreement) as of the grant date measured over a two-year period or three-year period, as applicable. To earn the target number of market-based restricted stock units (which represents 50 % of the number of the market-based restricted stock units set forth in the table above), the Company must perform at the 50 th percentile, with the maximum number of market-based restricted stock units earned if the Company performs at the 75 th percentile.
Performance-based restricted stock units granted pursuant to the 2022 Management Agreement in fiscal year 2024 are eligible to vest on June 1, 2026, and those granted in fiscal year 2023 are eligible to vest on June 1, 2024 and June 1, 2025. Performance-based restricted stock units granted in fiscal year 2023 pursuant to the 2017 Management Agreement are eligible to vest on April 13, 2024. The performance-based restricted stock units, of which certain are tied to "IP" and "RCS" (as defined in the relevant grant agreement), are eligible to vest based on the Company's achievement of certain performance metrics (as defined in the relevant grant agreement) of either individual product releases of "IP" measured over a two-year period or "RCS" measured over a two-year or three-year period. The target number of performance-based restricted stock units that may be earned pursuant to these grants is equal to 50 % of the grant amounts set forth in the above table (the numbers in the table represent the maximum number of performance-based restricted stock units that may be earned). At the end of each reporting period, we assess the probability of each performance metric and upon determination that certain thresholds are probable, we record expense for the unvested portion of the shares of performance-based restricted stock units.
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The unvested portions of time-based, market-based and performance-based restricted stock units held by ZMC were 1.3 and 1.1 as of December 31, 2023 and March 31, 2023, respectively. During the nine months ended December 31, 2023, 0.2 restricted stock units previously granted to ZMC vested, and 0.0 restricted stock units were forfeited by ZMC.
4. FAIR VALUE MEASUREMENTS
Recurring fair value measurements
The carrying amounts of our financial instruments, including cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, prepaid expenses and other, accounts payable, and accrued expenses and other current liabilities, approximate fair value because of their short maturities.
We follow a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of "observable inputs" and minimize the use of "unobservable inputs." The three levels of inputs used to measure fair value are as follows:
•Level 1—Quoted prices in active markets for identical assets or liabilities.
•Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for markets that are not active or other inputs that are observable or can be corroborated by observable market data.
•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
The table below segregates all assets and liabilities that are measured at fair value on a recurring basis (which is measured at least annually) into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.
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| December 31, 2023 | |||||||||||||||||||||||||||||
| Quoted prices in active markets for identical assets (level 1) | Significant other observable inputs (level 2) | Significant unobservable inputs (level 3) | Total | ||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents: | |||||||||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | |||||||||||||||||||||||||
| Bank-time deposits | |||||||||||||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||||||||
| Bank-time deposits | |||||||||||||||||||||||||||||
| Restricted cash and cash equivalents: | |||||||||||||||||||||||||||||
| Money market funds | |||||||||||||||||||||||||||||
| Bank-time deposits | |||||||||||||||||||||||||||||
| Restricted cash and cash equivalents, long term: | |||||||||||||||||||||||||||||
| Money market funds | |||||||||||||||||||||||||||||
| Other assets: | |||||||||||||||||||||||||||||
| Private equity | |||||||||||||||||||||||||||||
| Total financial assets | $ | $ | $ | $ | |||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||
| Accrued expenses and other current liabilities: | |||||||||||||||||||||||||||||
| Foreign currency forward contracts | $ | $ | $ | $ | |||||||||||||||||||||||||
| Contingent earn-out consideration | |||||||||||||||||||||||||||||
| Other-long term liabilities: | |||||||||||||||||||||||||||||
| Contingent earn-out consideration | |||||||||||||||||||||||||||||
| Short-term debt, net: | |||||||||||||||||||||||||||||
| Convertible notes | |||||||||||||||||||||||||||||
| Long-term debt, net: | |||||||||||||||||||||||||||||
| Convertible notes | |||||||||||||||||||||||||||||
| Total financial liabilities | $ | $ | $ | $ | |||||||||||||||||||||||||
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| March 31, 2023 | ||||||||||||||||||||||||||
| Quoted prices in active markets for identical assets (level 1) | Significant other observable inputs (level 2) | Significant unobservable inputs (level 3) | Total | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Cash and cash equivalents: | ||||||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | ||||||||||||||||||||||
| Bank-time deposits | ||||||||||||||||||||||||||
| Short-term investments: | ||||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||
| Bank-time deposits | ||||||||||||||||||||||||||
| Restricted cash and cash equivalents: | ||||||||||||||||||||||||||
| Money market funds | ||||||||||||||||||||||||||
| Bank-time deposits | ||||||||||||||||||||||||||
| Restricted cash and cash equivalents, long term: | ||||||||||||||||||||||||||
| Money market funds | ||||||||||||||||||||||||||
| Other assets: | ||||||||||||||||||||||||||
| Private equity | ||||||||||||||||||||||||||
| Total financial assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Accrued expenses and other current liabilities: | ||||||||||||||||||||||||||
| Foreign currency forward contracts | $ | $ | $ | $ | ||||||||||||||||||||||
| Contingent earn-out consideration | ||||||||||||||||||||||||||
| Other long-term liabilities: | ||||||||||||||||||||||||||
| Contingent earn-out consideration | ||||||||||||||||||||||||||
| Long-term debt, net: | ||||||||||||||||||||||||||
| Convertible notes | ||||||||||||||||||||||||||
| Total financial liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
We did not have any transfers between Level 1 and Level 2 fair value measurements, nor did we have any transfers into or out of Level 3 during the nine months ended December 31, 2023.
In connection with the Nordeus acquisition we completed on June 1, 2021, our consideration included a contingent earn-out consideration arrangement that requires us to pay an aggregate of $153.0 in cash if Nordeus achieves certain performance measures over the 12 - and 24 -month periods following the closing. We recorded $61.1 as the initial fair value of contingent earn-out consideration. The fair value was estimated using a Monte-Carlo simulation model, which included significant unobservable Level 3 inputs, such as projected financial performance over the earn-out period along with estimates for market volatility and the discount rate applicable to potential cash payouts.
During the nine months ended December 31, 2023, we recognized General and administrative expense of $4.5 within our Condensed Consolidated Statements of Operations for the increase in fair value of the contingent earn-out consideration liability associated with the Nordeus acquisition, which increased the fair value of the contingent consideration liability related to the second earn-out period to $69.5 . During the nine months ended December 31, 2023, we paid $69.5 related to the second earn-out period.
In connection with our acquisition of Popcore GmbH ("Popcore") we completed on November 16, 2022, our consideration included a contingent earn-out consideration arrangement that requires us to pay an aggregate of $105.0 in cash if Popcore achieves certain performance measures over each of the calendar years following the closing. We recorded $23.3 as the initial fair value of contingent earn-out consideration. The fair value was estimated using a Monte-Carlo simulation model, which included significant unobservable Level 3 inputs, such as projected financial performance over the earn-out period along with estimates for market volatility and the discount rate applicable to potential cash payouts.
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During the three and nine months ended December 31, 2023 we recognized General and administrative expense of $(13.1 ) and $(6.3 ), respectively, within our Condensed Consolidated Statements of Operations for the change in fair value of the contingent earn-out consideration liability associated with the Popcore acquisition. The fair value of the contingent consideration liability related to the earn-out period is $19.3 , with $12.0 and $7.3 being recorded within Accrued expenses and other current liabilities and Other long-term liabilities, respectively, in our Condensed Consolidated Balance Sheet as of December 31, 2023. The change resulted from a lower probability of Popcore achieving certain performance measures in all three 12 -month periods.
The remaining contingent earn-out consideration liability of $0.4 and $0.2 recorded within Accrued expenses and other current liabilities and Other long-term liabilities, respectively, in our Condensed Consolidated Balance Sheet as of December 31, 2023 relates to immaterial earn-out arrangements from Zynga's historical acquisitions. For these acquisitions, we estimated the acquisition date fair value of the contingent consideration obligations using a discounted cash flow model.
Nonrecurring fair value measurements
We hold equity investments in certain unconsolidated entities without a readily determinable fair value. These strategic investments represent less than a 20% ownership interest in each of the privately-held affiliates, and we do not maintain significant influence over or control of the entities. We have elected the practical expedient in Topic 321, Investments-Equity Securities, to measure these investments at cost less any impairment, adjusted for observable price changes, if any. Based on these considerations, we estimate that the carrying value of the acquired shares represents the fair value of the investment. At December 31, 2023, and March 31, 2023, we held $8.0 and $8.0 , respectively, of such investments in Other assets within our Condensed Consolidated Balance Sheet.
5. SHORT-TERM INVESTMENTS
Our Short-term investments consisted of the following:
| December 31, 2023 | ||||||||||||||||||||||||||
| Gross Unrealized | ||||||||||||||||||||||||||
| Cost or Amortized Cost | Gains | Losses | Fair Value | |||||||||||||||||||||||
| Short-term investments | ||||||||||||||||||||||||||
| Bank time deposits | $ | $ | $ | $ | ||||||||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||||
| Total Short-term investments | $ | $ | $ | $ | ||||||||||||||||||||||
| March 31, 2023 | ||||||||||||||||||||||||||
| Gross Unrealized | ||||||||||||||||||||||||||
| Cost or Amortized Cost | Gains | Losses | Fair Value | |||||||||||||||||||||||
| Short-term investments | ||||||||||||||||||||||||||
| Bank time deposits | $ | $ | $ | $ | ||||||||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||||||||||||
| Corporate bonds | ( | |||||||||||||||||||||||||
| Total Short-term investments | $ | $ | $ | ( | $ | |||||||||||||||||||||
The following table summarizes the contracted maturities of our short-term investments at December 31, 2023:
| December 31, 2023 | ||||||||||||||
| Amortized Cost | Fair Value | |||||||||||||
| Short-term investments | ||||||||||||||
| Due in 1 year or less | $ | $ | ||||||||||||
| Total Short-term investments | $ | $ | ||||||||||||
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6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Our risk management strategy includes the use of derivative financial instruments to reduce the volatility associated with changes in foreign currency exchange rates on earnings, cash flows, and certain balance sheet amounts. We do not enter into derivative financial contracts for speculative or trading purposes. We recognize derivative instruments as either assets or liabilities on our Consolidated Balance Sheets, and we measure those instruments at fair value. We classify cash flows from derivative transactions as cash flows from operating activities in our Consolidated Statements of Cash Flows.
Foreign currency forward contracts
The following table shows the gross notional amounts of foreign currency forward contracts:
| December 31, 2023 | March 31, 2023 | |||||||||||||
| Forward contracts to sell foreign currencies | $ | $ | ||||||||||||
| Forward contracts to purchase foreign currencies | ||||||||||||||
7. SOFTWARE DEVELOPMENT COSTS AND LICENSES
Details of our capitalized software development costs and licenses were as follows:
| December 31, 2023 | March 31, 2023 | |||||||||||||||||||||||||
| Current | Non-current | Current | Non-current | |||||||||||||||||||||||
| Software development costs, internally developed | $ | $ | $ | $ | ||||||||||||||||||||||
| Software development costs, externally developed | ||||||||||||||||||||||||||
| Licenses | ||||||||||||||||||||||||||
| Software development costs and licenses | $ | $ | $ | $ | ||||||||||||||||||||||
During the three months ended December 31, 2023 and 2022, we recorded $0.0 and $1.7 , respectively, of software development impairment charges (a component of Cost of revenue). The impairment charges recorded during the three months ended December 31, 2022 related to decisions not to proceed with further development of certain interactive entertainment software.
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8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
| December 31, 2023 | March 31, 2023 | |||||||||||||
| Software development royalties | $ | $ | ||||||||||||
| Compensation and benefits | ||||||||||||||
| Marketing and promotions | ||||||||||||||
| Licenses | ||||||||||||||
| Tax payable | ||||||||||||||
| Refund liability | ||||||||||||||
| Interest payable | ||||||||||||||
| Sales tax liability | ||||||||||||||
| Deferred acquisition payments | ||||||||||||||
| Other | ||||||||||||||
| Accrued expenses and other current liabilities | $ | $ | ||||||||||||
9. DEBT
The components of Long-term debt, net on our Condensed Consolidated Balance Sheet were as follows:
| Annual Interest Rate | Maturity Date | December 31, 2023 | Fair Value (Level 2) | |||||||||||||||||||||||
| 2025 Notes | April 14, 2025 | $ | $ | |||||||||||||||||||||||
| 2026 Notes | March 28, 2026 | |||||||||||||||||||||||||
| 2027 Notes | April 14, 2027 | |||||||||||||||||||||||||
| 2028 Notes | March 28, 2028 | |||||||||||||||||||||||||
| 2032 Notes | April 14, 2032 | |||||||||||||||||||||||||
| 2026 Convertible Notes | December 15, 2026 | |||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||
| Unamortized discount and issuance costs | ( | |||||||||||||||||||||||||
| Long-term debt, net | $ | |||||||||||||||||||||||||
| Annual Interest Rate | Maturity Date | March 31, 2023 | Fair Value (Level 2) | |||||||||||||||||||||||
| 2025 Notes | April 14, 2025 | $ | $ | |||||||||||||||||||||||
| 2027 Notes | April 14, 2027 | |||||||||||||||||||||||||
| 2032 Notes | April 14, 2032 | |||||||||||||||||||||||||
| 2024 Convertible Notes | June 1, 2024 | |||||||||||||||||||||||||
| 2026 Convertible Notes | December 15, 2026 | |||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||
| Unamortized discount and issuance costs | ( | |||||||||||||||||||||||||
| Long-term debt, net | $ | |||||||||||||||||||||||||
The components of Short-term debt, net on our Condensed Consolidated Balance Sheet were as follows:
| Annual Interest Rate | Maturity Date | December 31, 2023 | Fair Value (Level 2) | |||||||||||||||||||||||
| 2024 Notes | March 28, 2024 | $ | $ | |||||||||||||||||||||||
| 2024 Convertible Notes | June 1, 2024 | |||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||
| Unamortized discount and issuance costs | ||||||||||||||||||||||||||
| Short-term debt, net | $ | |||||||||||||||||||||||||
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| Annual Interest Rate | Maturity Date | March 31, 2023 | Fair Value (Level 2) | |||||||||||||||||||||||
| 2024 Notes | March 28, 2024 | $ | $ | |||||||||||||||||||||||
| Term Loan | June 21, 2023 | |||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||
| Unamortized discount and issuance costs | ( | |||||||||||||||||||||||||
| Short-term debt, net | $ | |||||||||||||||||||||||||
Interest expense as it relates to our debt is recorded within Interest and other, net in our Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2023, and 2022, respectively, and was as follows:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| 2024 Notes | $ | $ | $ | $ | ||||||||||||||||||||||
| 2025 Notes | ||||||||||||||||||||||||||
| 2026 Notes | ||||||||||||||||||||||||||
| 2027 Notes | ||||||||||||||||||||||||||
| 2028 Notes | ||||||||||||||||||||||||||
| 2032 Notes | ||||||||||||||||||||||||||
| Term Loan | ||||||||||||||||||||||||||
| 2022 Credit Agreement | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
The following table outlines the aggregate amount of maturities of our borrowings, as of December 31, 2023:
| Fiscal Year Ending March 31, | Maturities | |||||||
| 2024 (remaining) | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Thereafter | ||||||||
| Total | ||||||||
| Fair value adjustments | ( | |||||||
| Total face value | $ | |||||||
Senior Notes
On April 14, 2023, we completed our offering and sale of $1,000.0 aggregate principal amount of our senior notes, consisting of $500.0 principal amount of our 5.000 % Senior Notes due 2026 (the "2026 Notes") and $500.0 principal amount of our 4.950 % Senior Notes due 2028 ("the 2028 Notes").
On April 14, 2022, we completed our offering and sale of $2,700.0 aggregate principal amount of our senior notes, consisting of $1,000.0 principal amount of our 3.300 % Senior Notes due 2024 (the “2024 Notes”), $600.0 principal amount of our 3.550 % Senior Notes due 2025 (the “2025 Notes”), $600.0 principal amount of our 3.700 % Senior Notes due 2027 (the “2027 Notes”), and $500.0 principal amount of our 4.000 % Senior Notes due 2032 (the “2032 Notes” and together with the 2024 Notes, 2025 Notes, 2026 Notes, 2027 Notes, and 2028 Notes, the "Senior Notes").
The Senior Notes were issued under an indenture, dated as of April 14, 2022 (the “Base Indenture”), between the Company and The Bank of New York Mellon, as trustee (the “Trustee”) and (i) a first supplemental indenture, with respect to the 2024 Notes, (ii) a second supplemental indenture, with respect to the 2025 Notes, (iii) a third supplemental indenture, with respect to the 2027 Notes, (iv) a fourth supplemental indenture, with respect to the 2032 Notes, (v) a fifth supplemental indenture, with respect to the 2026 Notes, and (vi) a sixth supplemental indenture, with respect to the 2028 Notes (collectively, the “Supplemental Indentures” and together with the Base Indenture, the “Indenture”), between the Company and the Trustee.
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The Senior Notes are the Company’s senior unsecured obligations and rank equally with all of our other existing and future unsubordinated obligations. We will pay interest on the 2024 Notes, 2026 Notes, and 2028 Notes semi-annually on March 28 and September 28 of each year, commencing September 28, 2022 for the 2024 Notes and September 28, 2023 for the 2026 Notes and 2028 Notes. We will pay interest on each of the 2025 Notes, 2027 Notes, and 2032 Notes semi-annually on April 14 and October 14 of each year, commencing October 14, 2022. During the nine months ended December 31, 2023, we made interest payments of $95.9 . The proceeds from the issuances of the Senior Notes were used to finance a portion of our acquisition of Zynga and repay certain of our debt.
The Senior Notes are not entitled to any sinking fund payments. We may redeem each series of the Senior Notes at any time in whole or from time to time in part at the applicable redemption prices set forth in each Supplemental Indenture. Upon the occurrence of a Change of Control Repurchase Event (as defined in each of the Supplemental Indentures) with respect to a series of the Senior Notes, each holder of the Senior Notes of such series will have the right to require the Company to purchase that holder’s Notes of such series at a price equal to 101 % of the aggregate principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase, unless the Company has exercised its option to redeem all the Senior Notes.
In the case of an event of default arising from certain events of bankruptcy or insolvency with respect to the Company, all outstanding Senior Notes will become due and payable immediately. If any other event of default specified in the Indenture occurs and is continuing with respect to any series of the Senior Notes, the Trustee or the holders of at least 25 % in aggregate principal amount of that series of the outstanding Notes may declare the principal of such series of Senior Notes immediately due and payable.
The Indenture contains certain limitations on the ability of the Company and its subsidiaries to grant liens without equally securing the Senior Notes, or to enter into certain sale and lease-back transactions. These covenants are subject to a number of important exceptions and limitations, as further provided in the Indenture.
Debt issuance costs of $26.6 and original issuance discount of $1.9 were incurred in connection with the Senior Notes. These debt issuance costs and original issuance discount are included as a reduction of the debt within Long-term debt, net on our Condensed Consolidated Balance Sheet and will be amortized into Interest and other, net in our Consolidated Statements of Operations over the contractual term of the Senior Notes. During the three months ended December 31, 2023 and 2022, we recognized $1.2 and $1.4 , respectively, of amortization of debt issuance costs and $0.1 and $0.1 , respectively, of amortization of the original issuance discount. During the nine months ended December 31, 2023 and 2022, we recognized $4.8 and $4.0 , respectively, of amortization of debt issuance costs and $0.3 and $0.3 , respectively, of amortization of the original issuance discount.
On June 5, 2023, pursuant to a tender offer, we purchased and retired $650.0 in aggregate principal amount of our 2024 Notes, resulting in a remaining principal amount of $350.0 recorded within Short-term debt, net on our Condensed Consolidated Balance Sheet. During the nine months ended December 31, 2023, we recognized a debt extinguishment gain of approximately $7.7 , net of unamortized debt discount and debt issuance costs recorded within Interest and other, net in our Condensed Consolidated Statement of Operations. The purchase of a portion of our 2024 Notes was funded with proceeds received from the 2026 Notes and 2028 Notes.
Credit Agreement
On May 23, 2022, we entered into a new unsecured Credit Agreement (the "2022 Credit Agreement"), which replaced in its entirety the Company's prior Credit Agreement, dated as of February 8, 2019, which was paid off in full and terminated. The 2022 Credit Agreement provides for an unsecured five-year revolving credit facility with commitments of $500.0 , including sublimits for (i) the issuance of letters of credit in an aggregate face amount of up to $100.0 and (ii) borrowings and letters of credit denominated in Pounds Sterling, Euros, and Canadian Dollars in an aggregate principal amount of up to $100.0 . In addition, the 2022 Credit Agreement contains uncommitted incremental capacity permitting the incurrence of up to an additional amount not to exceed the greater of $250.0 and 35.0 % of the Company's Consolidated Adjusted EBITDA (as defined in the 2022 Credit Agreement).
Loans under the 2022 Credit Agreement will bear interest at a rate of (a) 0.000 % to 0.625 % above an alternate base rate (8.50 % at December 31, 2023) or (b) 1.000 % to 1.625 % above Secured Overnight Financing Rate ("SOFR"), approximately 5.35 % at December 31, 2023, which rates are determined by the Company's credit rating.
The 2022 Credit Agreement also includes, among other terms and conditions, a maximum leverage ratio covenant, as well as customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur subsidiary indebtedness, grant liens, and dispose of all or substantially all assets, in each case subject to certain exceptions and baskets. In addition, the 2022 Credit Agreement provides for events of default customary for a credit facility of this size and type, including, among others, non-payment of principal and interest when
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due thereunder, breaches of representations and warranties, noncompliance with covenants, acts of insolvency, cross-defaults to material indebtedness, and material judgment defaults (subject to certain limitations and cure periods).
Upon execution of the 2022 Credit Agreement, we incurred $3.5 of debt issuance costs that were capitalized within Other assets on our Condensed Consolidated Balance Sheet and will be amortized on a straight-line basis over the five-year term of the 2022 Credit Agreement, with the expense recorded within Interest and other, net in our Condensed Consolidated Statements of Operations. During the three months ended December 31, 2023, and 2022, we amortized $0.2 and $0.2 , respectively, and during the nine months ended December 31, 2023 and 2022 we amortized $0.5 and $0.5 , respectively, of these debt issuance costs.
As of December 31, 2023, there were no borrowings under the 2022 Credit Agreement, and we had approximately $499.5 available for additional borrowings.
Information related to availability on our 2022 Credit Agreement for each period was as follows:
| December 31, 2023 | March 31, 2023 | |||||||||||||
| Available borrowings | $ | $ | ||||||||||||
| Outstanding letters of credit | ||||||||||||||
Term Loan
On June 22, 2022, we entered into an unsecured 364 -Day Term Loan Credit Agreement ("Term Loan"). The Term Loan provided for an unsecured 364 -day term loan credit facility in the aggregate principal amount of $350.0 , maturing on June 21, 2023. We fully drew down on the Term Loan on June 22, 2022 at approximately 3.60 %. The proceeds were used to finance a portion of the repurchase of the Convertible Notes (see below). A portion of the proceeds from the April 14, 2023 issuance of the 2026 Notes and 2028 Notes were used to fully repay the Term Loan on April 27, 2023.
Convertible Notes
In conjunction with the acquisition of Zynga on May 23, 2022 (refer to Note 13 - Acquisitions), we entered into (a) the First Supplemental Indenture (the “2024 Supplemental Indenture”) to the Indenture, dated as of June 14, 2019 (the “2024 Indenture”), between Zynga and Computershare Trust Company, N.A. (as successor to Wells Fargo Bank, National Association) (the “Convertible Notes Trustee”), relating to Zynga’s 0.25 % Convertible Senior Notes due 2024 (the “2024 Convertible Notes”), and (b) the First Supplemental Indenture (the “2026 Supplemental Indenture” and, together with the 2024 Supplemental Indenture, the “Supplemental Indentures”) to the Indenture, dated as of December 17, 2020 (the “2026 Indenture” and, together with the 2024 Indenture, the “Indentures”), between Zynga and the Convertible Notes Trustee, relating to Zynga’s 0.00 % Convertible Senior Notes due 2026 (the “2026 Convertible Notes” and, together with the 2024 Convertible Notes, the “Convertible Notes”). As of the closing date of the acquisition, approximately $690.0 aggregate principal amount of the 2024 Convertible Notes was outstanding and approximately $874.5 aggregate principal amount of the 2026 Convertible Notes was outstanding.
Following the acquisition and according to the Supplemental Indentures, we assumed all of Zynga’s rights and obligations under the Indentures, and the Company guaranteed the payment and other obligations of Zynga under the Convertible Notes. As a result of our acquisition of Zynga, the right to convert each one thousand dollar principal amount of such Convertible Notes into shares of Zynga common stock was changed into a right to convert such principal amount of such Convertible Notes into the number of units of Reference Property equal to the conversion rate in effect immediately prior to the closing, in each case pursuant to the terms and procedures set forth in the applicable Indenture. A unit of Reference Property is defined in each Indenture as 0.0406 shares of Take-Two common stock and $3.50 in cash, without interest, plus cash in lieu of any fractional shares of Take-Two common stock.
The 2024 Convertible Notes and 2026 Convertible Notes mature on June 1, 2024, and December 15, 2026, respectively, unless earlier converted, redeemed, or repurchased in accordance with their terms, respectively, prior to the maturity date. Interest is payable semiannually on the 2024 Convertible Notes in arrears on March 1 and September 1 of each year. The 2026 Convertible Notes do not bear regular interest, and the principal amount does not accrete.
The acquisition of Zynga constituted a Fundamental Change, a Make-Whole Fundamental Change, and a Share Exchange Event (each as defined in the Indentures) under the Indentures. The effective date of the Fundamental Change, Make-Whole Fundamental Change and Share Exchange Event in respect of the Convertible Notes was May 23, 2022, and the related tender and conversion periods expired on June 22, 2022. As a result, each holder of Convertible Notes had the right to tender its Convertible Notes to the Company for cash or surrender its Convertible Notes for conversion into the Reference Property at the applicable conversion rate, in each case pursuant to the terms and procedures set forth in the applicable Indenture.
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As of the expiration of the Fundamental Change, Make-Whole Fundamental Change, and Share Exchange Event, (a) $0.3 aggregate principal amount of the 2024 Convertible Notes and (b) $845.1 aggregate principal amount of the 2026 Convertible Notes were tendered for cash. In addition, (a) $668.3 aggregate principal amount of the 2024 Convertible Notes, and (b) no 2026 Convertible Notes were surrendered for conversion into the applicable Reference Property. In total, we paid $321.6 for the tendered or converted 2024 Convertible Notes, including interest, and $845.1 for the tendered 2026 Convertible Notes in cash, and we issued 3.7 shares of our common stock upon the conversion of the 2024 Convertible Notes. After settlement of all Convertible Notes tendered or surrendered for conversion, $21.4 aggregate principal amount of the 2024 Convertible Notes remained outstanding and $29.4 aggregate principal amount of the 2026 Convertible Notes remained outstanding at December 31, 2023.
The 2024 Convertible Notes and 2026 Convertible Notes constitute senior unsecured indebtedness of Zynga, ranking pari passu with all of our other existing and future senior unsecured unsubordinated obligations of Zynga. As a result, the 2024 Convertible Notes and 2026 Convertible Notes are structurally senior to the indebtedness of the Company as to Zynga, its subsidiaries, and their respective assets. As noted above, the Company also guaranteed the payment and other obligations of Zynga under the Convertible Notes. The Company's guarantees of the 2024 Convertible Notes and 2026 Convertible Notes are the Company's senior unsecured obligations and rank equally with all of the Company's other existing and future senior unsecured unsubordinated obligations.
Under the terms of the applicable Indentures, prior to the close of business on the business day immediately preceding March 1, 2024 with respect to the 2024 Convertible Notes and September 15, 2026 with respect to the 2026 Convertible Notes, the Convertible Notes will be convertible only under the following circumstances:
• during any calendar quarter, if the value of a unit of Reference Property (based on the last reported sales price of our common stock), for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price of the applicable series of the 2024 Convertible Notes or 2026 Convertible Notes, respectively, on each applicable trading day;
• during the five business-day period after any five consecutive trading-day period in which the trading price per one thousand dollar principal amount of each applicable series of the 2024 Convertible Notes or 2026 Convertible Notes for such trading day was less than 98 % of the product of the value of a unit of Reference Property (based on the last reported sale price of our common stock) and the conversion rate of the applicable series of the 2024 Convertible Notes or 2026 Convertible Notes, respectively, on each such trading day;
• if we call the 2024 Convertible Notes or 2026 Convertible Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the respective redemption date; or
• upon the occurrence of specified corporate events described in the respective Indentures.
Upon any conversion, holders will receive either cash or a combination of cash and shares of Take-Two common stock, at our election. As of December 31, 2023, the conditions allowing holders of the Convertible Notes to convert their respective series of the Convertible Notes have not been met, and, therefore, both the Convertible Notes are not yet convertible.
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10. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per share:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Computation of Basic and diluted loss per share: | ||||||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Weighted average shares outstanding—basic | ||||||||||||||||||||||||||
| Basic and diluted loss per share | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
We incurred a net loss for the three and nine months ended December 31, 2023 and 2022; therefore, the diluted weighted average shares outstanding excludes the effect of unvested common stock equivalents because their effect would be antidilutive. For the three months ended December 31, 2023, we had 2.2 potentially dilutive shares from share-based awards and 0.2 of shares from Convertible Notes that are excluded due to the net loss for the period. For the nine months ended December 31, 2023, we had 2.2 potentially dilutive shares from share-based awards and 0.2 of shares from Convertible Notes that are excluded due to the net loss for the period.
11. COMMITMENTS AND CONTINGENCIES
We have entered into various agreements in the ordinary course of business that require substantial cash commitments over the next several years. Other than agreements entered into in the ordinary course of business and in addition to the agreements requiring known cash commitments as reported in Note 14 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023, we did not have any significant changes to our commitments since March 31, 2023.
Legal and Other Proceedings
We are, or may become, subject to demands and claims (including intellectual property and employment related claims) and are involved in routine litigation in the ordinary course of business which we do not believe to be material to our business or financial condition or results of operations. We have appropriately accrued amounts related to certain of these claims and legal and other proceedings. While it is reasonably possible that a loss may be incurred in excess of the amounts accrued in our financial statements, we believe that such losses, unless otherwise disclosed, would not be material.
12. INCOME TAXES
The benefit from income taxes for the three months ended December 31, 2023 is based on our projected annual effective tax rate for fiscal year 2024, adjusted for specific items that are required to be recognized in the period in which they are incurred. The benefit from income taxes was $60.7 for the three months ended December 31, 2023, as compared to the benefit from income taxes of $46.7 for the prior year period.
When compared to the statutory rate of 21%, the effective tax rate of 39.9 % for the three months ended December 31, 2023 was due primarily to tax benefits of $40.0 related to the changes in unrecognized tax benefits from a lapse in statute, tax benefits of $4.5 from tax credits, offset by tax expense of $6.8 related to geographic mix of earnings and tax expense of $4.9 related to an increase in the U.S. valuation allowance.
The benefit from income taxes for the nine months ended December 31, 2023 is based on our projected annual effective tax rate for fiscal year 2024, adjusted for specific items that are required to be recognized in the period in which they are incurred. The benefit from income taxes was $117.0 for the nine months ended December 31, 2023, as compared to the benefit from income taxes of $93.1 for the prior year period.
When compared to the statutory rate of 21%, the effective tax rate of 12.2 % for the nine months ended December 31, 2023 was due primarily to tax expense of $86.5 related to an increase in the U.S. valuation allowance, tax expense of $33.5 related to the impairment of nondeductible goodwill, tax expense of $7.0 related to geographic mix of earnings offset by tax benefits of $46.5 from tax credits and tax benefits of $40.0 related to the changes in unrecognized tax benefits from a lapse in statute.
The Tax Cuts and Jobs Act of 2017 (“TCJA”) requires taxpayers to capitalize and amortize research and development costs pursuant to Internal Revenue Code ("IRC") Section 174. The requirement was effective for the Company beginning April
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1, 2022. Congress is considering legislation that would repeal or otherwise modify the domestic capitalization and amortization under Section 174 of the TCJA.
The Inflation Reduction Act of 2022 (the “Inflation Reduction Act”) includes a new corporate alternative minimum tax (CAMT) of 15% on the adjusted financial statement income (AFSI) of corporations with an average AFSI exceeding $1.0 billion over a consecutive three-year period. The CAMT is effective for taxable year ending March 31, 2024. It is possible that the CAMT could result in an additional tax liability over the regular federal corporate tax liability in a particular year based on differences between book and taxable income. We estimate no tax liability relating to CAMT for the current fiscal year. We will continue to evaluate the potential impact the Inflation Reduction Act may have on our operations and Consolidated Financial Statements in future periods.
We are regularly examined by domestic and foreign taxing authorities. Examinations may result in tax assessments in excess of amounts claimed and the payment of additional taxes. We believe our tax positions comply with applicable tax law, and that we have adequately provided for reasonably foreseeable tax assessments. It is possible that settlement of audits or the expiration of the statute of limitations may have an impact on our effective tax rate in future periods.
13. ACQUISITIONS
Zynga Acquisition
On May 23, 2022, we completed the Zynga Acquisition. Under the terms and conditions of the merger agreement, each Zynga stockholder received $3.50 in cash and 0.0406 shares of our common stock and cash in lieu of fractional shares for each share of Zynga common stock outstanding at closing. Our consideration consisted of an aggregate of $3,992.4 in cash, 46.3 shares of our common stock, and $151.7 of replacement equity awards attributable to the pre-acquisition service period. In connection with the transaction, on April 14, 2022, we completed our offering and sale of $2,700.0 aggregate principal amount of our Senior Notes (refer to Note 9 - Debt). The cash portion of the merger consideration was funded from our cash on hand, including the proceeds from our senior notes offering.
We acquired Zynga as part of our ongoing strategy to expand selectively our portfolio of owned intellectual property and to diversify and strengthen further our mobile offerings.
The acquisition-date fair value of the consideration totaled $9,521.8 , which consisted of the following:
| Fair value of purchase consideration | |||||
| Cash | $ | ||||
Common stock ( | |||||
| Replacement equity awards | |||||
| Total | $ | ||||
We used the acquisition method of accounting and recognized assets acquired and liabilities assumed at their fair value as of the date of acquisition, with the excess recorded to goodwill. The following table summarizes the acquisition date fair value of net tangible and intangible assets acquired, net of liabilities assumed from Zynga:
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| Fair Value | Weighted average useful life | |||||||
| Cash acquired | $ | N/A | ||||||
| Accounts receivable | N/A | |||||||
| Prepaid expenses and other | N/A | |||||||
| Fixed assets | N/A | |||||||
| Right-of-use assets | N/A | |||||||
| Other tangible assets | N/A | |||||||
| Accounts payable | ( | N/A | ||||||
| Accrued expenses and other current liabilities | ( | N/A | ||||||
| Deferred revenue | ( | N/A | ||||||
| Lease liabilities | ( | N/A | ||||||
| Long-term debt | ( | N/A | ||||||
| Non-current lease liabilities | ( | N/A | ||||||
| Deferred tax liabilities, net | ( | N/A | ||||||
| Other liabilities assumed | ( | N/A | ||||||
| Intangible Assets | ||||||||
| Developed game technology | ||||||||
| Branding and trade names | ||||||||
| Game engine technology | ||||||||
| User base | ||||||||
| Developer relationships | ||||||||
| Advertising technology | ||||||||
| Customer relationships | ||||||||
| Goodwill | N/A | |||||||
| Total | $ | |||||||
Popcore Acquisition
On November 16, 2022, we completed the acquisition of 100 % of Popcore, a privately-held Germany-based free-to-play mobile game developer, for initial consideration of $116.9 in cash, 0.6 shares of our common stock, and a contingent earn-out consideration arrangement that requires us to pay up to an aggregate of $105.0 in cash if Popcore achieves certain performance measures over each of the calendar years following the closing. The cash portion was funded from our cash on hand.
We acquired Popcore as part of our ongoing strategy to expand selectively our portfolio of owned intellectual property and to diversify and strengthen further our mobile offerings.
The acquisition-date fair value of the consideration totaled $198.0 , which consisted of the following:
| Fair value of purchase consideration | |||||
| Cash | $ | ||||
Common stock ( | |||||
| Contingent earn-out | |||||
| Total | $ | ||||
The fair value of the contingent earn-out consideration arrangement at the acquisition date was $23.3 . We estimated the fair value of the contingent earn-out consideration using a Monte Carlo simulation model. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. (Refer to Note 4 - Fair Value Measurements).
We used the acquisition method of accounting and recognized assets and liabilities at their fair value as of the date of acquisition, with the excess recorded to goodwill. The following table summarizes the acquisition date fair value of net tangible and intangible assets acquired, net of liabilities assumed from Popcore:
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| Fair Value | Weighted average useful life | |||||||
| Cash acquired | $ | N/A | ||||||
| Other tangible assets | N/A | |||||||
| Other liabilities assumed | ( | N/A | ||||||
| Intangible Assets | ||||||||
| Developed game technology | ||||||||
| Game engine technology | ||||||||
| Branding and trade names | ||||||||
| Goodwill | N/A | |||||||
| Total | $ | |||||||
Goodwill, which is not deductible for tax purposes, is primarily attributable to the assembled workforce of the acquired business and expected synergies at the time of the acquisition.
14. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
| Total | ||||||||
| Balance at March 31, 2023 | $ | |||||||
| Additions from immaterial acquisitions | ||||||||
| Impairment | ( | |||||||
| Currency translation adjustment | ||||||||
| Balance at December 31, 2023 | $ | |||||||
During the nine months ended December 31, 2023, we recognized a goodwill impairment charge of $165.4 , representing a partial impairment related to one of our reporting units. We identified various qualitative factors that, collectively, indicated that the fair value of one of our reporting units was more likely than not less than its carrying amount, including a reduction in the forecasted performance of the reporting unit due to industry conditions and changes in our strategies for games within the reporting unit in response to those conditions. As a result of this qualitative analysis, we performed a valuation of the reporting unit using discounted cash flow and guideline public company methodologies. Key assumptions and estimates used in deriving the fair value are forecasted revenue, EBITDA margins, long-term growth rate, and discount rate. There were no goodwill impairment charges for the three and nine months ended December 31, 2022.
Intangibles
| December 31, 2023 | March 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Book Value | Gross Carrying Amount | Accumulated Amortization | Net Book Value | Weighted average useful life | ||||||||||||||||||||||||||||||||||||||
| Developed Game Technology | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Branding and Trade Names | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Game Engine Technology | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| User Base | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Developer Relationships | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Advertising Technology | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Customer relationships | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Analytics Technology | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Intellectual Property | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| In Place Lease | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
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| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Cost of revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Selling and marketing | ||||||||||||||||||||||||||
| Research and development | ||||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||
| Total amortization of intangible assets | $ | $ | $ | $ | ||||||||||||||||||||||
During the three and nine months ended December 31, 2023, we recorded impairment charges of $53.4 and $273.1 , respectively, for acquisition-related Developed Game Technology intangible assets within Cost of revenue as a result of a reduction in the forecasted performance of certain games due to industry conditions and changes in our strategies for certain games in response to those conditions. The fair value of those intangible assets was measured using the multi-period excess earnings method, consistent with the approach used at acquisition. Key assumptions and estimates used in deriving the fair value are forecasted revenue, EBITDA margins, long-term decay rate, and discount rate. There were no impairment charges for intangible assets for the three and nine months ended December 31, 2022.
Estimated future amortization of intangible assets that will be recorded in Cost of revenue and operating expenses are as follows:
| Fiscal Year Ended March 31, | Amortization | |||||||
| 2024 (remaining) | $ | |||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
15. SUBSEQUENT EVENTS
On January 8, 2024, we completed our add-on offering and sale of $350.0 aggregate principal amount of our senior notes, consisting of $50.0 principal amount of 5.000 % Senior Notes due 2026 (the "2026 Notes") and $300.0 principal amount of 4.950 % Senior Notes due 2028 (the "2028 Notes"). The additional 2026 Notes and 2028 Notes (the “New Notes”) were issued as additional notes under the existing Indenture (refer to Note 9 - Debt) pursuant to which we previously issued $500.0 aggregate principal amount of the 5.000 % Senior Notes due 2026 and $500.0 aggregate principal amount of the 4.950 % Senior Notes due 2028 (the “Existing Notes” and, together with the New Notes, the “Notes”), all of which remain outstanding. The New Notes have the same terms as the respective series of Existing Notes other than the date of issuance and the initial offering price, are treated as a single series of securities with the respective series of Existing Notes under the Indenture, are fungible with the respective series of Existing Notes for U.S. federal income tax purposes and have the same respective CUSIP numbers as the Existing Notes.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
The statements contained herein, which are not historical facts, including statements relating to Take-Two Interactive Software, Inc.'s ("Take-Two," the "Company," "we," "us," or similar pronouns) outlook, are considered forward-looking statements under federal securities laws and may be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "potential," "predicts," "projects," "seeks," "should," "will," or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. Such forward-looking statements are based on the current beliefs of our management as well as assumptions made by and information currently available to them, which are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Actual outcomes and results may vary materially from these forward-looking statements based on a variety of risks and uncertainties including risks relating to our combination with Zynga Inc. (the "Zynga Acquisition"); the risks of conducting business internationally, including as a result of unforeseen geopolitical events; the impact of changes in interest rates by the Federal Reserve and other central banks, including on our short-term investment portfolio; the impact of inflation; volatility in foreign currency exchange rates; our dependence on key management and product development personnel; our dependence on our NBA 2K and Grand Theft Auto products and our ability to develop other hit titles; our ability to leverage opportunities on PlayStation®5 and Xbox Series X|S; factors affecting our mobile business, such as player acquisition costs; the timely release and significant market acceptance of our games; the ability to maintain acceptable pricing levels on our games; and other risks included herein; as well as, but not limited to, the risks and uncertainties discussed under the heading "Risk Factors" included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023; and our other periodic filings with the Securities and Exchange Commission. All forward-looking statements are qualified by these cautionary statements and speak only as of the date they are made. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.
Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided in addition to the accompanying Condensed Consolidated Financial Statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. The following discussion should be read in conjunction with the MD&A and our annual Consolidated Financial Statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023. All figures are in millions, except per share amounts or as otherwise noted.
Overview
Impairments
During the nine months ended December 31, 2023, we recognized a Goodwill impairment charge of $165.4, representing a partial impairment related to one of our reporting units and during the three and nine months ended December 31, 2023, we recognized impairment charges of $53.4 and $273.1, respectively, for acquisition-related Developed Game Technology intangible assets within Cost of revenue as a result of a reduction in the forecasted performance of certain games due to industry conditions and changes in our strategies in response to those conditions. Key assumptions and estimates used in deriving the fair value are forecasted revenue, EBITDA margins, long-term decay rate, and discount rate (refer to Note 14 - Goodwill and Intangible Assets, Net). Future changes in those key assumptions and estimates could result in additional impairments.
Debt Transactions
On April 14, 2023, we completed our offering and sale of $1,000.0 aggregate principal amount of our senior notes, consisting of $500.0 principal amount of our 5.000% Senior Notes due 2026 (the "2026 Notes") and $500.0 principal amount of our 4.950% Senior Notes due 2028 (the "2028 Notes"). On January 8, 2024, we completed our add-on offering and sale of $350.0 aggregate principal amount of our senior notes, consisting of $50.0 principal amount of additional 2026 Notes and $300.0 principal amount of additional 2028 Notes. The additional 2026 Notes and 2028 Notes (the “New Notes”) were issued as additional notes under the existing Indenture (refer to Note 9 - Debt and Note 15 - Subsequent Events). We intend to use the proceeds from the offering of the New Notes for general corporate purposes, including the retirement at maturity of our 2024 Notes.
On April 14, 2022, we completed our offering and sale of $2,700.0 aggregate principal amount of our senior notes, consisting of $1,000.0 principal amount of our 3.300% Senior Notes due 2024 (the “2024 Notes”), $600.0 principal amount of our 3.550% Senior Notes due 2025 (the “2025 Notes”), $600.0 principal amount of our 3.700% Senior Notes due 2027 (the “2027 Notes”), and $500.0 principal amount of our 4.000% Senior Notes due 2032 (the “2032 Notes” and, together with the 2024 Notes, 2025 Notes, 2026 Notes, 2027 Notes, and 2028 Notes, the "Senior Notes").
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The Senior Notes are the Company’s senior unsecured obligations and rank equally with all of our other existing and future unsubordinated obligations. We will pay interest on the 2024 Notes, 2026 Notes, and 2028 Notes semi-annually on March 28 and September 28 of each year, commencing September 28, 2022 for the 2024 Notes and September 28, 2023 for the 2026 Notes and 2028 Notes. We will pay interest on each of the 2025 Notes, 2027 Notes, and 2032 Notes semi-annually on April 14 and October 14 of each year, commencing October 14, 2022. The proceeds from the issuances of the Senior Notes were used to finance a portion of our acquisition of Zynga and repay certain of our debt.
On June 5, 2023, pursuant to a tender offer, we purchased and retired $650.0 in aggregate principal amount of our 2024 Notes, resulting in a remaining principal amount of $350.0 recorded within Short-term debt, net on our Condensed Consolidated Balance Sheet. During the nine months ended December 31, 2023, we recognized a debt extinguishment gain of approximately $7.7, net of unamortized debt discount and debt issuance costs recorded within Interest and other, net in our Condensed Consolidated Statement of Operations. The purchase of a portion of our 2024 Notes was funded with proceeds received from the 2026 Notes and 2028 Notes.
On June 22, 2022, we entered into an unsecured 364-Day Term Loan Credit Agreement ("Term Loan"). We fully drew down on the Term Loan on June 22, 2022 at approximately 3.60%. The proceeds were used to finance a portion of the repurchase of the Convertible Notes (refer to Note 9 - Debt). A portion of the proceeds from the 2026 Notes and 2028 Notes were used to fully repay the Term Loan on April 27, 2023.
Our Business
We are a leading developer, publisher, and marketer of interactive entertainment for consumers around the globe. We develop, operate, and publish products principally through Rockstar Games, 2K, Private Division, and Zynga. Our products are currently designed for console gaming systems, PC, and mobile, including smartphones and tablets. We deliver our products through physical retail, digital download, online platforms, and cloud streaming services.
Our strategy is to be the most creative, innovative, and efficient company in the evolving interactive entertainment industry. With our diverse portfolio that spans all key platforms and numerous genres, we strive to create the highest quality, most engaging interactive entertainment franchises and captivate our global audience. Most of our intellectual property is internally owned and developed, which we believe best positions us financially and competitively. We have established a portfolio of proprietary software content for the major hardware and mobile platforms in a wide range of genres, including action, adventure, family/casual, hyper-casual, role-playing, shooter, social casino, sports, and strategy, which we distribute worldwide. We believe that our commitment to creativity and innovation is a distinguishing strength, enabling us to differentiate our products in the marketplace by combining advanced technologies and features with compelling storylines and characters that provide unique gameplay experiences for consumers. We have created, acquired, or licensed a group of highly recognizable brands to match the broad consumer demographics that we serve, ranging from adults to children and game enthusiasts to casual gamers. Another cornerstone of our strategy is to support the success of our products in the marketplace through innovative marketing programs and global distribution on platforms and through channels that are relevant to our target audience.
We derive substantially all of our revenue from the sale of our interactive entertainment content, which includes the sale of internally developed software titles and software titles developed by third parties, the sale of in-game virtual items and advertising, and live services on console, PC, and mobile. Operating margins are dependent in part upon our ability to release new, commercially successful software products and to manage effectively their development and marketing costs. We have internal development studios located in Australia, Canada, China, Czech Republic, Finland, Germany, Hungary, India, Serbia, South Korea, Spain, Turkey, the United Kingdom (U.K.), and the United States (U.S.).
Rockstar Games. Rockstar Games' strategy is to develop a limited number of titles that are known for their quality and longevity in the market for which they can create sequels and incremental revenue opportunities through virtual currency, add-on content, and in-game purchases. Software titles published by our Rockstar Games label are primarily internally developed. We expect Rockstar Games, our wholly-owned publisher of the Grand Theft Auto, LA Noire, Max Payne, Midnight Club, Red Dead Redemption, and other popular franchises, to continue to be a leader in the action/adventure product category and to create groundbreaking entertainment. We believe that Rockstar Games has established a uniquely original, popular, cultural phenomenon with its Grand Theft Auto series, which is the interactive entertainment industry's most iconic and critically acclaimed brand and has sold-in over 415 units worldwide. Our most recent installment, Grand Theft Auto V, which was released in 2013, has sold-in over 190 units worldwide and includes access to Grand Theft Auto Online. Rockstar Games continues to invest in the franchise and plans to release Grand Theft Auto VI in 2025. The label released its first trailer for the title in December 2023 and will share more details over time. Red Dead Redemption 2, which has been a critical and commercial success that set numerous entertainment industry records, has sold-in more than 60 units worldwide to date. Rockstar Games continues to expand on its established series by developing sequels, offering downloadable episodes, and providing additional content. Rockstar Games' titles are published across all key platforms, including mobile.
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2K. Our 2K label has published a variety of popular entertainment properties across all key platforms and across a range of genres including shooter, action, role-playing, strategy, sports, and family/casual entertainment. In recent years, 2K has expanded its offerings to include several new franchises that are expected to enhance and diversify its slate of games and provide opportunities for sequels and post-launch monetization. We expect 2K to continue to develop new, successful franchises in the future. 2K's internally owned and developed franchises include the critically acclaimed, multi-million unit selling BioShock, Mafia, Sid Meier's Civilization, and XCOM franchises. 2K also publishes externally developed franchises such as Borderlands and Tiny Tina's Wonderlands. 2K's realistic sports simulation titles include our flagship NBA 2K series, which continues to be the top-ranked NBA basketball video game, the WWE 2K professional wrestling series, and PGA TOUR 2K. 2K also publishes mobile titles, including WWE SuperCard. We have expanded our relationship with the NBA through the NBA 2K League, a competitive eSports league jointly owned by us and the NBA.
Private Division. Our Private Division label is dedicated to bringing titles from the industry's leading creative talent to market and is the publisher, developer, and owner of Kerbal Space Program and OlliOlli World. Private Division actively establishes relationships with new studios and has announced upcoming projects with a number of independent studios. Kerbal Space Program 2 was released for early access in fiscal year 2023. Private Division also previously released The Outer Worlds and Ancestors: The Humankind Odyssey.
Zynga. Our Zynga label publishes popular free-to-play mobile games that deliver high quality, deeply engaging entertainment experiences and generates revenue from in-game sales and in-game advertising. Zynga's strategy is to have numerous games in concept development and to determine which titles are best suited for soft launch and worldwide launch based on the achievement of various milestones and KPI thresholds. Zynga's diverse portfolio of popular game franchises has been downloaded more than six billion times, including CSR Racing, Dragon City, Empires & Puzzles, FarmVille, Golf Rival, Harry Potter: Puzzles & Spells, Match Factory!, Merge Dragons!, Merge Magic, Monster Legends, Toon Blast!, Top Eleven, Top Troops, Toy Blast, Two Dots, Words With Friends, Zynga Poker, and a high volume of hyper-casual mobile titles, including Fill the Fridge!, Parking Jam 3D, Power Slap, Pull the Pin, Twisted Tangle, and Tangled Snakes. Zynga is also an industry-leading next-generation platform with the ability to acquire new users, cross-promote games, apply live services content updates, and optimize programmatic advertising and yields at scale through Chartboost, its leading mobile advertising and monetization platform.
International Business. The global market for interactive entertainment continues to grow, and we seek to increase our presence internationally, particularly in Asia, the Middle East, and Latin America. We are continuing to execute on our growth initiatives in Asia, where our strategy is to build on our licensing relationships and also broaden the distribution of our existing products and expand our online gaming presence, especially in China and South Korea. 2K has secured a multi-year license from the NBA to develop an online version of our NBA simulation game in China, Taiwan, Hong Kong, and Macau. Our first such title, NBA 2K Online, a free-to-play NBA simulation game based on the console edition of NBA 2K, which was co-developed by 2K and Tencent, is the top online PC sports game in China with over 60 registered users. We have released two iterations of NBA 2K Online and continue to enhance the title with new features. We are also a direct publisher in Japan and South Korea. While we retain title to all intellectual property, in some regions, local publishers, under license agreements, are responsible for localization of software content, distribution, and marketing of the products in their respective local markets.
Trends and Factors Affecting our Business
Product Release Schedule. Our financial results are affected by the timing of our product releases and the commercial success of those titles. Generally, a significant portion of our revenue has been derived from a few popular franchises, particularly around new releases within those franchises. Some of these franchises have annual or biennial releases. Our Grand Theft Auto products in particular have historically accounted for a significant portion of our revenue. Sales of Grand Theft Auto products generated 15.2% of our net revenue for the nine months ended December 31, 2023. The timing of our Grand Theft Auto product releases may affect our financial performance on a quarterly and annual basis.
Economic Environment and Retailer Performance. We continue to monitor various macroeconomic and geopolitical factors that may affect our business in several areas, including consumer demand, inflation, pricing pressure on our products, credit quality of our receivables, and foreign currency exchange rates. For example, in response to the conflict in Ukraine, we suspended sales of our products in Russia and Belarus, which had a negative impact on our financial results. Actions taken to date and other potential actions could result in additional negative impact in future periods.
The economic environment has affected our customers in the past and may do so in the future. Bankruptcies or consolidations of our large retail customers could seriously hurt our business, due to uncollectible accounts receivable and the concentration of purchasing power among the remaining large retailers. There has been increased consolidation in our industry, as larger, better capitalized competitors will be in a stronger position to withstand prolonged periods of economic downturn and sustain their business through the financial volatility.
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Hardware Platforms. We derive a substantial portion of our revenue from the sale of products made for video game consoles manufactured by third parties. Such console revenue comprised 40.5% of our net revenue for the nine months ended December 31, 2023. The success of our business is dependent upon the consumer acceptance of these platforms and the continued growth in the installed base of these platforms. We manage our product delivery on each current and future platform in a manner we believe to be most effective to maximize our revenue opportunities and achieve the desired return on our investments in product development. Accordingly, our strategy for these platforms is to focus our development efforts on a select number of the highest quality titles.
Online Content and Digital Distribution. The interactive entertainment software industry is delivering a growing amount of content through digital online delivery methods. We provide a variety of online delivered products and offerings. Virtually all of our titles that are available through retailers as packaged goods products are also available through direct digital download (from digital storefronts we own and others owned by third parties) as well as a large selection of our catalog titles. As disclosed in our "Results of Operations," below, net revenue from digital online channels comprised 95.6% of our net revenue for the nine months ended December 31, 2023. We expect online delivery of games and game offerings to continue to be the primary part of our business over the long term.
We also publish an expanding variety of titles for mobile, which are delivered to consumers through digital download, and are primarily distributed, marketed, and promoted through third parties, primarily Apple’s App Store and the Google Play Store. Virtual items for our mobile games are purchased through the payment processing systems of these platform providers. We generate a significant portion of our net revenue through the Apple and Google platforms and expect to continue to do so for the foreseeable future as we launch more games for mobile. Apple and Google generally have the discretion to set the amounts of their platform fees and change their platforms’ terms of service and other policies with respect to us or other developers at their sole discretion, and those changes may be unfavorable to us. These platform fees are recorded as cost of revenue as incurred. Further, as a result of the platform fees associated with online game sales, our mobile net revenue generally generates a lower gross margin percentage than our Console or PC revenue. Accordingly, the overall product mix between mobile and other game sales may affect our gross margin percentage. We are also starting to expand our direct-to-consumer efforts more meaningfully across our mobile portfolio to enhance profitability.
In addition, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through virtual currency, add-on content, in-game purchases, and in-game advertising, all of which are typically delivered digitally.
Player acquisition costs. Principally for our mobile titles, we use advertising and other forms of player acquisition and retention to grow and retain our player audience. These expenditures, which are recorded within Sales and marketing in our Consolidated Statements of Operations, generally relate to the promotion of new game launches and ongoing performance-based programs to drive new player acquisition and lapsed player reactivation. Over time, the effectiveness or cost of these acquisition and retention-related programs may change, affecting our operating results.
Content Release Highlights
During fiscal year 2024, 2K released LEGO 2K Drive and NBA 2K24; Zynga released Power Slap, Match Factory!, and Top Troops; and Private Division released After Us.
To date we have announced that, during the remainder of fiscal year 2024, 2K will release WWE 2K24, and Private Division will release Penny's Big Breakaway. Rockstar will release Grand Theft Auto VI in 2025.
In addition, throughout the year, we expect to continue to deliver new content for our franchises. We will also continue to invest in opportunities that we believe will enhance and scale our business and have the potential to drive growth over the long term.
Critical Accounting Policies and Estimates
Our most critical accounting policies, which are those that require significant judgment, include revenue recognition; price protection and allowances for returns; capitalization and recognition of software development costs and licenses; fair value estimates including valuation of goodwill, and intangible assets; valuation and recognition of stock-based compensation; and income taxes. In-depth descriptions of our other critical accounting policies and estimates can be found in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.
Recently Adopted and Recently Issued Accounting Pronouncements
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Operating Metric
Net Bookings
We monitor Net Bookings as a key operating metric in evaluating the performance of our business. Net Bookings is defined as the net amount of products and services sold digitally or sold-in physically during the period and includes licensing fees, merchandise, in-game advertising, strategy guides, and publisher incentives. Net Bookings were as follows:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | Increase/ (decrease) | % Increase/ (decrease) | 2023 | 2022 | Increase/ (decrease) | % Increase/ (decrease) | |||||||||||||||||||||||||||||||||||||||||||
| Net Bookings | $ | 1,337.8 | $ | 1,382.8 | $ | (45.0) | (3.3) | % | $ | 3,984.2 | $ | 3,890.1 | $ | 94.1 | 2.4 | % | ||||||||||||||||||||||||||||||||||
For the three months ended December 31, 2023, Net Bookings decreased by $45.0 as compared to the prior year period. The decrease was primarily due to a decrease in Net Bookings from our PGA TOUR 2K franchise, the latest installment of which, PGA TOUR 2K23 released in October 2022; Marvel's Midnight Suns, which released in December 2022; Empires & Puzzles; our NBA 2K franchise; our hyper-casual mobile portfolio; Merge Dragons!; Golf Rival; Words with Friends; Tiny Tina's Wonderlands, which released in March 2022; Toy Blast; our Sid Meier's Civilization franchise; Wizard of Oz Slots; Two Dots; The Quarry, which released in June 2022; and Harry Potter: Puzzles & Spells. These decreases were partially offset by an increase in Net Bookings from our Grand Theft Auto and Red Dead Redemption franchises, including our August 2023 release of Red Dead Redemption and Undead Nightmare; Toon Blast!; LEGO 2K Drive, which released in May 2023; Match Factory!, which released in November 2023; and Top Troops, which released in October 2023.
For the nine months ended December 31, 2023, Net Bookings increased by $94.1 as compared to the prior year period. The increase was primarily due to an increase in Net Bookings of $237.0 from Zynga, which we acquired in May 2022 (refer to Note 13 - Acquisitions), including from our hyper-casual mobile portfolio, which benefited from our November 2022 acquisition of Popcore (refer to Note 13 - Acquisitions), and our other top contributors Empires & Puzzles, Toon Blast!, Words with Friends, and Merge Dragons!, as well as an increase in Net Bookings from our Grand Theft Auto franchise. These increases were partially offset by a decrease in Net Bookings from Tiny Tina's Wonderlands and our NBA 2K franchise.
Results of Operations
The following tables set forth, for the periods indicated, our Condensed Consolidated Statements of Operations, net revenue by platform, net revenue by distribution channel, and net revenue by content type:
| Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| (millions of dollars) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 1,366.3 | 100.0 | % | $ | 1,407.8 | 100.0 | % | $ | 3,950.2 | 100.0 | % | $ | 3,903.7 | 100.0 | % | |||||||||||||||||||||||||||||||
| Cost of revenue | 688.2 | 50.3 | % | 691.9 | 49.1 | % | 2,177.5 | 55.1 | % | 1,841.6 | 47.2 | % | |||||||||||||||||||||||||||||||||||
| Gross profit | 678.1 | 49.7 | % | 715.9 | 50.9 | % | 1,772.7 | 44.9 | % | 2,062.1 | 52.8 | % | |||||||||||||||||||||||||||||||||||
| Selling and marketing | 367.6 | 26.9 | % | 446.7 | 31.7 | % | 1,103.1 | 27.9 | % | 1,163.1 | 29.8 | % | |||||||||||||||||||||||||||||||||||
| Research and development | 232.4 | 17.0 | % | 238.2 | 16.9 | % | 710.7 | 18.0 | % | 655.2 | 16.8 | % | |||||||||||||||||||||||||||||||||||
| General and administrative | 165.0 | 12.1 | % | 168.9 | 12.0 | % | 542.7 | 13.7 | % | 620.6 | 15.9 | % | |||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 42.6 | 3.1 | % | 35.0 | 2.5 | % | 128.3 | 3.2 | % | 86.0 | 2.2 | % | |||||||||||||||||||||||||||||||||||
| Goodwill impairment | — | — | % | — | — | % | 165.4 | 4.2 | % | — | — | % | |||||||||||||||||||||||||||||||||||
| Total operating expenses | 807.6 | 59.1 | % | 888.8 | 63.1 | % | 2,650.2 | 67.0 | % | 2,524.9 | 64.7 | % | |||||||||||||||||||||||||||||||||||
| Loss from operations | (129.5) | (9.4) | % | (172.9) | (12.3) | % | (877.5) | (22.1) | % | (462.8) | (11.9) | % | |||||||||||||||||||||||||||||||||||
| Interest and other, net | (22.5) | (1.6) | % | (28.3) | (2.0) | % | (79.0) | (2.0) | % | (108.1) | (2.8) | % | |||||||||||||||||||||||||||||||||||
| (Loss) gain on fair value adjustments, net | (0.3) | — | % | 1.1 | 0.1 | % | (1.7) | — | % | (36.6) | (0.9) | % | |||||||||||||||||||||||||||||||||||
| Loss before income taxes | (152.3) | (11.0) | % | (200.1) | (14.2) | % | (958.2) | (24.1) | % | (607.5) | (15.6) | % | |||||||||||||||||||||||||||||||||||
| Benefit from income taxes | 60.7 | 4.4 | % | 46.7 | 3.3 | % | 117.0 | 3.0 | % | 93.1 | 2.4 | % | |||||||||||||||||||||||||||||||||||
| Net loss | $ | (91.6) | (6.6) | % | $ | (153.4) | (10.9) | % | $ | (841.2) | (21.1) | % | $ | (514.4) | (13.2) | % | |||||||||||||||||||||||||||||||
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| Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Net revenue by platform: | |||||||||||||||||||||||||||||||||||||||||||||||
| Mobile | $ | 706.7 | 51.7 | % | $ | 721.2 | 51.2 | % | $ | 2,032.9 | 51.5 | % | $ | 1,820.9 | 46.6 | % | |||||||||||||||||||||||||||||||
| Console | 547.6 | 40.1 | % | 561.4 | 39.9 | % | 1,598.6 | 40.5 | % | 1,720.5 | 44.1 | % | |||||||||||||||||||||||||||||||||||
| PC and other | 112.0 | 8.2 | % | 125.2 | 8.9 | % | 318.7 | 8.0 | % | 362.3 | 9.3 | % | |||||||||||||||||||||||||||||||||||
| Net revenue by content: | |||||||||||||||||||||||||||||||||||||||||||||||
| Recurrent consumer spending | $ | 1,034.7 | 75.7 | % | $ | 1,115.4 | 79.2 | % | $ | 3,103.5 | 78.6 | % | $ | 3,042.8 | 77.9 | % | |||||||||||||||||||||||||||||||
| Full game and other | 331.6 | 24.3 | % | 292.4 | 20.8 | % | 846.7 | 21.4 | % | 860.9 | 22.1 | % | |||||||||||||||||||||||||||||||||||
| Net revenue by distribution channel: | |||||||||||||||||||||||||||||||||||||||||||||||
| Digital online | $ | 1,297.3 | 94.9 | % | $ | 1,336.7 | 94.9 | % | $ | 3,777.0 | 95.6 | % | $ | 3,693.7 | 94.6 | % | |||||||||||||||||||||||||||||||
| Physical retail and other | 69.0 | 5.1 | % | 71.1 | 5.1 | % | 173.2 | 4.4 | % | 210.0 | 5.4 | % | |||||||||||||||||||||||||||||||||||
Three Months Ended December 31, 2023 Compared to December 31, 2022
| (millions of dollars) | 2023 | % | 2022 | % | Increase/ (decrease) | % Increase/ (decrease) | |||||||||||||||||||||||||||||
| Total net revenue | $ | 1,366.3 | 100.0 | % | $ | 1,407.8 | 100.0 | % | $ | (41.5) | (2.9) | % | |||||||||||||||||||||||
| Game intangibles | 230.1 | 16.8 | % | 202.5 | 14.4 | % | 27.6 | 13.6 | % | ||||||||||||||||||||||||||
| Product costs | 191.3 | 14.0 | % | 204.6 | 14.5 | % | (13.3) | (6.5) | % | ||||||||||||||||||||||||||
| Internal royalties | 134.1 | 9.8 | % | 116.7 | 8.3 | % | 17.4 | 14.9 | % | ||||||||||||||||||||||||||
| Licenses | 73.0 | 5.3 | % | 76.5 | 5.4 | % | (3.5) | (4.6) | % | ||||||||||||||||||||||||||
| Software development costs and royalties (1) | 59.7 | 4.4 | % | 91.6 | 6.5 | % | (31.9) | (34.8) | % | ||||||||||||||||||||||||||
| Cost of revenue | 688.2 | 50.3 | % | 691.9 | 49.1 | % | (3.7) | (0.5) | % | ||||||||||||||||||||||||||
| Gross profit | $ | 678.1 | 49.7 | % | $ | 715.9 | 50.9 | % | $ | (37.8) | (5.3) | % | |||||||||||||||||||||||
(1) Includes $6.3 and $8.4 of stock-based compensation expense in 2023 and 2022, respectively, in software development costs and royalties.
For the three months ended December 31, 2023, net revenue decreased by $41.5 as compared to the prior year period. The decrease was primarily due to a decrease in net revenue of $20.0 from our PGA TOUR 2K franchise, the latest installment of which, PGA TOUR 2K23, released in October 2022; $16.6 from Marvel's Midnight Suns, which released in December 2022; $15.7 from Empires & Puzzles; $8.5 from Tiny Tina's Wonderlands; $5.9 from Golf Rival; $5.7 from our hyper-casual mobile portfolio; $5.3 from Words With Friends; $5.0 from Toy Blast; $4.4 from our Civilization franchise; $4.3 from our NBA 2K franchise; $4.3 from Wizard of Oz Slots; $4.1 from Two Dots; $3.6 from The Quarry, which released in June 2022; $3.2 from Harry Potter: Puzzles and Spells; $3.0 from our Farmville franchise; $2.9 from Merge Dragons!; $1.8 from Dragon City; and $1.6 from Monster Legends. These decreases were partially offset by an increase in net revenue of $33.1 from our Grand Theft Auto franchise; $23.3 from our Red Dead Redemption franchise, including our August 2023 release of Red Dead Redemption and Undead Nightmare; $14.4 from Toon Blast!; $10.8 from LEGO 2K Drive, which released in May 2023; and $6.7 from Match Factory!, which released in December 2023.
Net revenue from mobile decreased by $14.5 and accounted for 51.7% of our total net revenue for three months ended December 31, 2023, as compared to 51.2% for the prior year period. The decrease was primarily due to a decrease in net revenue from Empires & Puzzles, Golf Rival, our hyper-casual mobile portfolio, Words With Friends, Toy Blast, Wizard of Oz Slots, Two Dots, Harry Potter: Puzzles and Spells, Merge Dragons!, our Farmville and WWE 2K franchises, and Puzzle Combat. These decreases were partially offset by an increase in net revenue from our Grand Theft Auto franchise, Toon Blast!, our NBA 2K franchise, and Match Factory!. Net revenue from console games decreased by $13.8 and accounted for 40.1% of our total net revenue for the three months ended December 31, 2023, as compared to 39.9% for the prior year period. The decrease in net revenue from console games was due to a decrease in net revenue from our PGA TOUR 2K franchise, Marvel's Midnight Suns, our NBA 2K franchise, Tiny Tina's Wonderlands, and our Grand Theft Auto franchise. These decreases were partially offset by increases in net revenue from our Red Dead Redemption franchise and LEGO 2K Drive. Net revenue from PC and other decreased by $13.2 and accounted for 8.2% of our total net revenue for the three months ended December 31, 2023, as compared to 8.9% for the prior year period. The decrease in net revenue from PC and other was primarily due to a decrease in net revenue from Marvel's Midnight Suns, Tiny Tina's Wonderlands, and our Sid Meier's Civilization, NBA 2K, and Red Dead Redemption franchises. These decreases were partially offset by an increase in net revenue from our Grand Theft Auto franchise.
Recurrent consumer spending ("RCS") is generated from ongoing consumer engagement and includes revenue from virtual currency, add-on content, in-game purchases, and in-game advertising. Net revenue from RCS decreased by $80.7 and
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accounted for 75.7% of net revenue for the three months ended December 31, 2023, as compared to 79.2% of net revenue for the prior year period. The decrease in net revenue from RCS was primarily due to a decrease in net revenue from our Grand Theft Auto franchise, Empires & Puzzles, Golf Rival, our hyper-casual mobile portfolio, Words With Friends, Toy Blast, and Two Dots. Net revenue from full game and other increased by $39.2 and accounted for 24.3% of net revenue for the three months ended December 31, 2023 as compared to 20.8% of net revenue for the prior year period. The increase in net revenue from full game and other was due primarily to an increase in net revenue from our Grand Theft Auto and Red Dead Redemption franchises. These increases were partially offset by a decrease in net revenue in Marvel's Midnight Suns and our PGA TOUR 2K franchise.
Net revenue from digital online channels decreased by $39.4 and accounted for 94.9% of our total net revenue for the three months ended December 31, 2023, as compared to 94.9% for the prior year period. The decrease was primarily due to a decrease in net revenue from Empires & Puzzles, our PGA TOUR 2K franchise, Marvel's Midnight Suns, Tiny Tina's Wonderlands, Golf Rival, our hyper-casual mobile portfolio, Words With Friends, Toy Blast, our Sid Meier's Civilization franchise, Wizard of Oz Slots, Two Dots, Harry Potter: Puzzles & Spells, our Farmville franchise, Merge Dragons!, The Quarry, Dragon City, and Monster Legends. These decreases were partially offset by an increase in net revenue from our Grand Theft Auto franchise, Toon Blast!, LEGO 2K Drive, our Red Dead Redemption franchise, and Match Factory!. Net revenue from physical retail and other channels decreased by $2.1 and accounted for 5.1% of our total net revenue for the three months ended December 31, 2023, as compared to 5.1% for the same period in the prior year period. The decrease in net revenue from physical retail and other channels was due primarily to a decrease in net revenue from Marvel's Midnight Suns, and our PGA TOUR 2K and NBA 2K franchises. These decreases were partially offset by an increase in net revenue from physical retail and other channels from our Red Dead Redemption franchise and LEGO 2K Drive.
Gross profit as a percentage of net revenue for the three months ended December 31, 2023 was 49.7% as compared to 50.9% for the prior year period. The decrease in gross profit as a percentage of net revenue was primarily due to (i) an impairment charge recognized for our acquisition-related Development Game Technology intangible asset (refer to Note 14 - Goodwill and Intangible Assets, Net) and (ii) higher internal royalties due to the timing of when royalties are earned, partially offset by lower amortization of capitalized software development costs and lower development royalties due primarily to the timing of releases.
Changes in foreign currency exchange rates increased net revenue by $3.5 and increased gross profit by $1.3 for the three months ended December 31, 2023 as compared to the prior year period.
Operating Expenses
| (millions of dollars) | 2023 | % of net revenue | 2022 | % of net revenue | Increase/ (decrease) | % Increase/ (decrease) | |||||||||||||||||||||||||||||
| Selling and marketing | $ | 367.6 | 26.9 | % | $ | 446.7 | 31.7 | % | $ | (79.1) | (17.7) | % | |||||||||||||||||||||||
| Research and development | 232.4 | 17.0 | % | 238.2 | 16.9 | % | (5.8) | (2.4) | % | ||||||||||||||||||||||||||
| General and administrative | 165.0 | 12.1 | % | 168.9 | 12.0 | % | (3.9) | (2.3) | % | ||||||||||||||||||||||||||
| Depreciation and amortization | 42.6 | 3.1 | % | 35.0 | 2.5 | % | 7.6 | 21.7 | % | ||||||||||||||||||||||||||
Total operating expenses(1) | $ | 807.6 | 59.1 | % | $ | 888.8 | 63.1 | % | $ | (81.2) | (9.1) | % | |||||||||||||||||||||||
(1) Includes stock-based compensation expense, which was allocated as follows:
| 2023 | 2022 | ||||||||||
| General and administrative | $ | 28.8 | $ | 25.9 | |||||||
| Research and development | 26.9 | 29.4 | |||||||||
| Selling and marketing | 23.9 | 23.0 | |||||||||
Changes in foreign currency exchange rates increased total operating expenses by $6.9 for the three months ended December 31, 2023, as compared to the prior year period.
Selling and marketing
Selling and marketing expenses decreased by $79.1 for the three months ended December 31, 2023, as compared to the prior year period, due primarily to lower amortization related to intangible assets related to our Zynga acquisition.
Research and development
Research and development expenses decreased by $5.8 for the three months ended December 31, 2023, as compared to the prior year period, primarily due to lower production and development expenses primarily due to additional capitalization of costs for development on titles having established technological feasibility compared to the prior year period, partially offset by an increase in personnel expense due to increased headcount.
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General and administrative
General and administrative expenses decreased by $3.9 for the three months ended December 31, 2023, as compared to the prior year period, due primarily to a decrease in the fair value of the contingent earn-out liability related to our acquisition of Popcore offset by an increase in personnel expenses due to increased headcount.
General and administrative expenses for the three months ended December 31, 2023 and 2022 included occupancy expense (primarily rent, utilities and office expenses) of $17.8 and $16.3, respectively, related to our development studios.
Depreciation and amortization
Depreciation and amortization expenses increased by $7.6 for the three months ended December 31, 2023 as compared to the prior year period, due primarily to leasehold improvements for office buildouts.
Interest and other, net
Interest and other, net was expense of $22.5 for the three months ended December 31, 2023, as compared to $28.3 for the prior year period. The net decrease in expense was due primarily to an increase in interest income primarily due to increases in interest rates, partially offset by an increase in foreign currency losses.
(Loss) gain on fair value adjustments, net
(Loss) gain on fair value adjustments, net was a loss of $0.3 for the three months ended December 31, 2023 as compared to a gain of $1.1 for the prior year period. The change was due primarily to a loss for the increase in the fair value of our Convertibles Notes as compared to a net gain in the prior year period for changes in fair value based on the observable price changes of our long-term investment.
Benefit from income taxes
The benefit from income taxes for the three months ended December 31, 2023 is based on our projected annual effective tax rate for fiscal year 2024, adjusted for specific items that are required to be recognized in the period in which they are incurred. The benefit from income taxes was $60.7 for the three months ended December 31, 2023, as compared to the benefit from income taxes of $46.7 for the prior year period.
When compared to the statutory rate of 21%, the effective tax rate of 39.9% for the three months ended December 31, 2023 was due primarily to tax benefits of $40.0 related to the changes in unrecognized tax benefits from a lapse in statute, tax benefits of $4.5 from tax credits, offset by tax expense of $6.8 related to geographic mix of earnings and tax expense of $4.9 related to an increase in the U.S. valuation allowance.
In the prior year period, when compared to the statutory rate of 21.0%, the effective tax rate of 23.3% for the three months ended December 31, 2022 was due primarily to tax benefits of $2.4 related to geographic mix of earnings, tax benefits of $1.0 from tax credits, and tax expense of $0.5 from employee stock-based compensation
The change in the effective tax rate, when compared to the prior year period's effective tax rate, is due primarily to increased benefits related to the changes in unrecognized tax benefits from a lapse in statute, increased benefits from tax credits, offset by increased tax expense from changes in the U.S. valuation allowance, and geographic mix of earnings.
The accounting for share-based compensation will increase or decrease our effective tax rate based upon the difference between our share-based compensation expense and the deductions taken on our tax return, which depends on the stock price at the time of the employee award vesting.
We anticipate that additional excess tax benefits or shortfalls from employee stock compensation, tax credits, and changes in our geographic mix of earnings could have a significant impact on our effective tax rate in the future. In addition, we are regularly examined by domestic and foreign taxing authorities. Examinations may result in tax assessments in excess of amounts claimed and the payment of additional taxes. We believe our tax positions comply with applicable tax law, and that we have adequately provided for reasonably foreseeable tax assessments. It is possible that settlement of audits or the expiration of the statute of limitations could have an impact on our effective tax rate in future periods.
The Tax Cuts and Jobs Act of 2017 (“TCJA”) requires taxpayers to capitalize and amortize research and development costs pursuant to Internal Revenue Code ("IRC") Section 174. The requirement was effective for the Company beginning April 1, 2022. Congress is considering legislation that would repeal or otherwise modify the domestic capitalization and amortization under Section 174 of the TCJA.
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The American Rescue Plan Act of 2021 (the “ARPA”), among other things, includes provisions to expand the IRC Section 162(m) disallowance for deduction of certain compensation paid by publicly held corporations. Effective for tax years starting after December 31, 2026 (April 1, 2027 for the Company), the ARPA expands the limitation to cover the next five most highly compensated employees. The ARPA did not have a material impact on our Condensed Consolidated Financial Statements for the three months ended December 31, 2023. We continue to evaluate the potential impact the ARPA may have on our operations and Consolidated Financial Statements in future periods.
The Inflation Reduction Act of 2022 (the “Inflation Reduction Act”) includes a new corporate alternative minimum tax (CAMT) of 15% on the adjusted financial statement income (AFSI) of corporations with an average AFSI exceeding $1.0 billion over a consecutive three-year period. The CAMT is effective for taxable year ending March 31, 2024. It is possible that the CAMT could result in an additional tax liability over the regular federal corporate tax liability in a particular year based on differences between book and taxable income. We estimate no tax liability relating to CAMT for the current fiscal year. We will continue to evaluate the potential impact the Inflation Reduction Act may have on our operations and Consolidated Financial Statements in future periods.
Net loss and Loss per share
For the three months ended December 31, 2023, net loss was $91.6, as compared to a net loss of $153.4 in the prior year period. Basic and diluted loss per share for the three months ended December 31, 2023 was $0.54, as compared to basic and diluted loss per share of $0.91 in the prior year period. Basic weighted average shares of 170.3 were 2.3 shares higher as compared to the prior year period basic weighted average shares, due primarily to normal stock compensation activity, including vests. See Note 10 - Loss Per Share to our Condensed Consolidated Financial Statements for additional information.
Nine Months Ended December 31, 2023 Compared to December 31, 2022
| (millions of dollars) | 2023 | % | 2022 | % | Increase/ (decrease) | % Increase/ (decrease) | |||||||||||||||||||||||||||||
| Total net revenue | $ | 3,950.2 | 100.0 | % | $ | 3,903.7 | 100.0 | % | $ | 46.5 | 1.2 | % | |||||||||||||||||||||||
| Game intangibles | 826.4 | 20.9 | % | 500.1 | 12.8 | % | 326.3 | 65.2 | % | ||||||||||||||||||||||||||
| Product costs | 545.9 | 13.8 | % | 526.0 | 13.5 | % | 19.9 | 3.8 | % | ||||||||||||||||||||||||||
| Software development costs and royalties (1) | 258.5 | 6.5 | % | 249.0 | 6.4 | % | 9.5 | 3.8 | % | ||||||||||||||||||||||||||
| Internal royalties | 319.5 | 8.1 | % | 334.4 | 8.6 | % | (14.9) | (4.5) | % | ||||||||||||||||||||||||||
| Licenses | 227.2 | 5.8 | % | 232.1 | 5.9 | % | (4.9) | (2.1) | % | ||||||||||||||||||||||||||
| Cost of revenue | 2,177.5 | 55.1 | % | 1,841.6 | 47.2 | % | 335.9 | 18.2 | % | ||||||||||||||||||||||||||
| Gross profit | $ | 1,772.7 | 44.9 | % | $ | 2,062.1 | 52.8 | % | $ | (289.4) | (14.0) | % | |||||||||||||||||||||||
(1) Includes $20.5 and $(17.0) of stock-based compensation expense in 2023 and 2022, respectively, in software development costs and royalties.
For the nine months ended December 31, 2023, net revenue increased by $46.5 as compared to the prior year period. The increase was primarily due to an increase in net revenue of $200.3 from Zynga, which we acquired in May 2022 (refer to Note 13 - Acquisitions), including from our hyper-casual mobile portfolio, which benefited from our November 2022 acquisition of Popcore (refer to Note 13 - Acquisitions), and other top contributors Empires & Puzzles, Toon Blast!, Merge Dragons!, and Words with Friends. The increase was partially offset by a decrease in net revenue of (i) $59.6 from Tiny Tina's Wonderlands, (ii) $41.9 from The Quarry, (iii) $41.5 from our NBA 2K franchise, and (iv) $17.1 from our WWE 2K franchise.
Net revenue from mobile increased by $212.0 and accounted for 51.5% of our total net revenue for nine months ended December 31, 2023, as compared to 46.6% for the prior year period. The increase was primarily due to an increase in net revenue of $197.5 as a result of our acquisition of Zynga, including from our hyper-casual mobile portfolio, and other top contributors Toon Blast!, Empires & Puzzles, Merge Dragons!, and Words with Friends. Net revenue from console games decreased by $121.9 and accounted for 40.5% of our total net revenue for the nine months ended December 31, 2023, as compared to 44.1% for the prior year period. The decrease was due to a decrease in net revenue from our NBA 2K franchise, Tiny Tina's Wonderlands, The Quarry, and our Grand Theft Auto franchise. These decreases were partially offset by an increase in net revenue from our Red Dead Redemption franchise. Net revenue from PC and other decreased by $43.6 and accounted for 8.0% of our total net revenue for the nine months ended December 31, 2023, as compared to 9.3% for the prior year period. The decrease was due to a decrease in net revenue from Tiny Tina's Wonderlands, The Quarry, and our Sid Meier's Civilization and NBA 2K franchises.
Recurrent consumer spending ("RCS") is generated from ongoing consumer engagement and includes revenue from virtual currency, add-on content, in-game purchases, and in-game advertising. Net revenue from RCS increased by $60.7 and
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accounted for 78.6% of net revenue for the nine months ended December 31, 2023, as compared to 77.9% of net revenue for the prior year period. The increase was primarily due to an increase in net revenue from RCS of $197.6 as a result of our acquisition of Zynga, including from our hyper-casual mobile portfolio, and other top contributors Empires & Puzzles, Toon Blast!, Merge Dragons!, and Words with Friends. These increases were partially offset by a decrease in net revenue from our Grand Theft Auto franchise, Tiny Tina's Wonderlands, our NBA 2K franchise, Two Dots, and our WWE 2K franchise. Net revenue from full game and other decreased by $14.2 and accounted for 21.4% of net revenue for the nine months ended December 31, 2023 as compared to 22.1% of net revenue for the prior year period. The decrease was due to a decrease in net revenue from The Quarry, Tiny Tina's Wonderlands, our NBA 2K franchise, Marvel's Midnight Suns, and our PGA TOUR 2K franchise. These decreases were partially offset by an increase in net revenue from our Grand Theft Auto and Red Dead Redemption franchises, and LEGO 2K Drive.
Net revenue from digital online channels increased by $83.3 and accounted for 95.6% of our total net revenue for the nine months ended December 31, 2023, as compared to 94.6% for the prior year period. The increase was primarily due to an increase in digital net revenue of $200.7 as a result of our acquisition of Zynga, including from our hyper-casual mobile portfolio, and other top contributors Empires & Puzzles, Toon Blast!, Merge Dragons!, and Words with Friends, as well as from our Red Dead Redemption franchise. This increase was partially offset by a decrease in net revenue from Tiny Tina's Wonderlands, The Quarry, and our NBA 2K and WWE 2K franchises. Net revenue from physical retail and other channels decreased by $36.8 and accounted for 4.4% of our total net revenue for the nine months ended December 31, 2023, as compared to 5.4% for the same period in the prior year period. The decrease in net revenue from physical retail and other channels was due primarily to a decrease in net revenue from our NBA 2K franchise, The Quarry, Marvel's Midnight Suns, our PGA TOUR 2K franchise, and Tiny Tina's Wonderlands. These decreases were partially offset by an increase in net revenue from our Red Dead Redemption franchise and LEGO 2K Drive.
Gross profit as a percentage of net revenue for the nine months ended December 31, 2023 was 44.9% as compared to 52.8% for the prior year period. The decrease in gross profit as a percentage of net revenue was primarily due to an impairment charge recognized for our acquisition-related Development Game Technology intangible assets (refer to Note 14 - Goodwill and Intangible Assets, Net).
Changes in foreign currency exchange rates increased net revenue by $9.4 and increased gross profit by $2.3 for the nine months ended December 31, 2023 as compared to the prior year period.
Operating Expenses
| (millions of dollars) | 2023 | % of net revenue | 2022 | % of net revenue | Increase/ (decrease) | % Increase/ (decrease) | |||||||||||||||||||||||||||||
| Selling and marketing | $ | 1,103.1 | 27.9 | % | $ | 1,163.1 | 29.8 | % | $ | (60.0) | (5.2) | % | |||||||||||||||||||||||
| Research and development | 710.7 | 18.0 | % | 655.2 | 16.8 | % | 55.5 | 8.5 | % | ||||||||||||||||||||||||||
| General and administrative | 542.7 | 13.7 | % | 620.6 | 15.9 | % | (77.9) | (12.6) | % | ||||||||||||||||||||||||||
| Depreciation and amortization | 128.3 | 3.2 | % | 86.0 | 2.2 | % | 42.3 | 49.2 | % | ||||||||||||||||||||||||||
| Goodwill impairment | 165.4 | 4.2 | % | — | — | % | 165.4 | 100.0 | % | ||||||||||||||||||||||||||
Total operating expenses (1) | $ | 2,650.2 | 67.0 | % | $ | 2,524.9 | 64.7 | % | $ | 125.3 | 5.0 | % | |||||||||||||||||||||||
(1) Includes stock-based compensation expense, which was allocated as follows (in millions):
| 2023 | 2022 | ||||||||||
| General and administrative | 82.3 | $ | 90.6 | ||||||||
| Research and development | 79.4 | 88.7 | |||||||||
| Selling and marketing | 72.8 | 76.2 | |||||||||
Changes in foreign currency exchange rates increased total operating expenses by $14.8 for the nine months ended December 31, 2023, as compared to the prior year period.
Selling and marketing
Selling and marketing expenses decreased by $60.0 for the nine months ended December 31, 2023, as compared to the prior year period, due primarily to lower amortization related to intangible assets offset by an increase in personnel expense due to increased headcount, as a result of our Zynga acquisition.
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Research and development
Research and development expenses increased by $55.5 for the nine months ended December 31, 2023, as compared to the prior year period, due primarily to increases in personnel expenses due to increased headcount, including related to our acquisition of Zynga, and costs related to our cost management initiatives. These increases were partially offset by lower production and development expenses primarily due to a reduction in the number of titles in development at certain studios as a result of our ongoing development pipeline management process and additional capitalization of costs for development on titles having established technological feasibility compared to the prior year.
General and administrative
General and administrative expenses decreased by $77.9 for the nine months ended December 31, 2023, as compared to the prior year period, due to a decrease in professional fees related to our acquisition and integration of Zynga and a decrease in the fair value of the contingent earn-out liability related to our acquisition of Popcore. The decreases were partially offset by an increase in personnel expense due to increased headcount as well as an increase in IT-related expenses for cloud-based services and IT infrastructure.
General and administrative expenses for the nine months ended December 31, 2023 and 2022 included occupancy expense (primarily rent, utilities and office expenses) of $51.4 and $45.8, respectively, related to our development studios.
Depreciation and amortization
Depreciation and amortization expenses increased by $42.3 for the nine months ended December 31, 2023, as compared to the prior year period, due primarily to leasehold improvements for office buildouts, acquired intangible assets, and depreciation expense related to Zynga.
Goodwill impairment
Goodwill impairment expenses increased by $165.4 for the nine months ended December 31, 2023, as compared to the prior year period, due to a partial impairment recognized related to one of our reporting units (refer to Note 14 - Goodwill and Intangible Assets, Net).
Interest and other, net
Interest and other, net was expense of $79.0 for the nine months ended December 31, 2023, as compared to $108.1 for the prior year period. The net decrease was due primarily to an increase in interest income primarily due to increases in interest rates, a gain on debt extinguishment recognized on the partial repayment of our 2024 Notes, a decrease in interest expense related to our bridge loan commitment in connection with our acquisition of Zynga in the prior year, and a decrease in foreign currency losses. These decreases in expense were partially offset by an increase in interest expense related to our debt transactions (refer to Note 9 - Debt).
Loss on fair value adjustments, net
Loss on fair value adjustments, net was $1.7 for the nine months ended December 31, 2023 as compared to $36.6 for the prior year period. The change was due primarily to a prior year loss for the increase in fair value of our Convertible Notes, partially offset by a prior year gain related to our Capped Calls, both as result of our Zynga Acquisition (refer to Note 9 - Debt and Note 13 - Acquisitions).
Benefit from Income Taxes
The benefit from income taxes for the nine months ended December 31, 2023 is based on our projected annual effective tax rate for fiscal year 2024, adjusted for specific items that are required to be recognized in the period in which they are incurred. The benefit from income taxes was $117.0 for the nine months ended December 31, 2023, as compared to the benefit from income taxes of $93.1 for the prior year period.
When compared to the statutory rate of 21%, the effective tax rate of 12.2% for the nine months ended December 31, 2023 was due primarily to tax expense of $86.5 related to an increase in the U.S. valuation allowance, tax expense of $33.5 related to the impairment of nondeductible goodwill, tax expense of $7.0 related to geographic mix of earnings offset by tax benefits of $46.5 from tax credits and tax benefits of $40.0 related to the changes in unrecognized tax benefits from a lapse in statute.
In the prior year period, when compared to the statutory rate of 21.0%, the effective tax rate of 15.3% for the nine months ended December 31, 2022 was due primarily to tax expense of $20.3 related to geographic mix of earnings, tax expense
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of $6.5 from employee stock-based compensation, nondeductible expense of $10.0 related to the settlement of convertible debt, offset by benefits of $31.9 from tax credits.
The change in the effective tax rate, when compared to the prior year period's effective tax rate, is due primarily to increased tax expense from changes in the U.S. valuation allowance, impairment of nondeductible goodwill, and increased benefits related to the changes in unrecognized tax benefits from a lapse in statute, increased benefits from tax credits, offset by geographic mix of earnings.
The accounting for share-based compensation will increase or decrease our effective tax rate based upon the difference between our share-based compensation expense and the deductions taken on our tax return, which depends on the stock price at the time of the employee award vesting.
We anticipate that additional excess tax benefits or shortfalls from employee stock compensation, tax credits, and changes in our geographic mix of earnings could have a significant impact on our effective tax rate in the future. In addition, we are regularly examined by domestic and foreign taxing authorities. Examinations may result in tax assessments in excess of amounts claimed and the payment of additional taxes. We believe our tax positions comply with applicable tax law, and that we have adequately provided for reasonably foreseeable tax assessments. It is possible that settlement of audits or the expiration of the statute of limitations could have an impact on our effective tax rate in future periods.
The Tax Cuts and Jobs Act of 2017 (“TCJA”) requires taxpayers to capitalize and amortize research and development costs pursuant to Internal Revenue Code ("IRC") Section 174. The requirement was effective for the Company beginning April 1, 2022. Congress is considering legislation that would repeal or otherwise modify the domestic capitalization and amortization under Section 174 of the TCJA.
The American Rescue Plan Act of 2021 (the “ARPA”), among other things, includes provisions to expand the IRC Section 162(m) disallowance for deduction of certain compensation paid by publicly held corporations. Effective for tax years starting after December 31, 2026 (April 1, 2027 for the Company), the ARPA expands the limitation to cover the next five most highly compensated employees. The ARPA did not have a material impact on our Condensed Consolidated Financial Statements for the nine months ended December 31, 2023. We continue to evaluate the potential impact the ARPA may have on our operations and Consolidated Financial Statements in future periods.
The Inflation Reduction Act of 2022 (the “Inflation Reduction Act”) includes a new corporate alternative minimum tax (CAMT) of 15% on the adjusted financial statement income (AFSI) of corporations with an average AFSI exceeding $1.0 billion over a consecutive three-year period. The CAMT is effective for taxable year ending March 31, 2024. It is possible that the CAMT could result in an additional tax liability over the regular federal corporate tax liability in a particular year based on differences between book and taxable income. We estimate no tax liability relating to CAMT for the current fiscal year. We will continue to evaluate the potential impact the Inflation Reduction Act may have on our operations and Consolidated Financial Statements in future periods.
Net loss and loss per share
For the nine months ended December 31, 2023, net loss was $841.2, as compared to net loss of $514.4 in the prior year period. For the nine months ended December 31, 2023, basic and diluted loss per share was $4.95 as compared to basic and diluted loss per share of $3.27 in the prior year period. Basic weighted average shares of 169.9 were 12.7 shares higher as compared to the prior year period, due primarily to stock issued as consideration for the Zynga Acquisition and for the conversion of Convertible Notes. See Note 10 - Loss Per Share to our Condensed Consolidated Financial Statements for additional information regarding earnings per share.
Liquidity and Capital Resources
Our primary cash requirements are to fund (i) the development, marketing, and manufacturing of our published products, (ii) working capital, (iii) capital expenditures, (iv) debt and interest payments, (v) tax payments, and (vi) acquisitions. We expect to rely on cash and cash equivalents as well as on short-term investments, funds provided by our operating activities, and our 2022 Credit Agreement to satisfy our working capital needs. Refer to Note 9 - Debt for additional discussion of our outstanding debt obligations.
Short-term investments
As of December 31, 2023, we had $23.5 of short-term investments, which are highly liquid in nature and represent an investment of cash that is available for current operations. From time to time, we may purchase additional short-term investments depending on future market conditions and liquidity needs. As of December 31, 2023, based on the composition of our investment portfolio and actions taken in recent months by central banks around the world, including the U.S. Federal
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Reserve, in response to rising inflation and related adverse economic conditions, we anticipate our investment yields may increase, which could increase our future interest income. Such impact is not expected to be material to our liquidity.
Senior Notes
On April 14, 2023, we completed our offering and sale of $1,000.0 aggregate principal amount of our senior notes, consisting of $500.0 principal amount of our 5.000% Senior Notes due 2026 (the "2026 Notes") and $500.0 principal amount of our 4.950% Senior Notes due 2028. On January 8, 2024, we completed our add-on offering and sale of $350.0 aggregate principal amount of our senior notes, consisting of $50.0 principal amount of additional 2026 Notes and $300.0 principal amount of additional 2028 Notes. The additional 2026 Notes and 2028 Notes (the “New Notes”) were issued as additional notes under the existing Indenture (refer to Note 9 - Debt and Note 15 - Subsequent Events). We intend to use the proceeds from the offering of the New Notes for general corporate purposes, including the retirement at maturity of our 2024 Notes.
On April 14, 2022, we completed our offering and sale of $2,700.0 aggregate principal amount of our senior notes, consisting of $1,000.0 principal amount of our 3.300% Senior Notes due 2024 (the “2024 Notes”), $600.0 principal amount of our 3.550% Senior Notes due 2025 (the “2025 Notes”), $600.0 principal amount of our 3.700% Senior Notes due 2027 (the “2027 Notes”), and $500.0 principal amount of our 4.000% Senior Notes due 2032 (the “2032 Notes” and, together with the 2024 Notes, 2025 Notes, 2026 Notes, 2027 Notes, and 2028 Notes, the "Senior Notes").
The Senior Notes are the Company’s senior unsecured obligations and rank equally with all of our other existing and future unsubordinated obligations. We will pay interest on the 2024 Notes, 2026 Notes, and 2028 Notes semi-annually on March 28 and September 28 of each year, commencing September 28, 2022 for the 2024 Notes and September 28, 2023 for the 2026 Notes and 2028 Notes. We will pay interest on each of the 2025 Notes, 2027 Notes, and 2032 Notes semi-annually on April 14 and October 14 of each year, commencing October 14, 2022. The proceeds from the issuances of the Senior Notes were used to finance a portion of our acquisition of Zynga and repay certain of our debt.
On June 5, 2023, pursuant to a tender offer, we purchased and retired $650.0 in aggregate principal amount of our 2024 Notes, resulting in a remaining principal amount of $350.0 recorded within Short-term debt, net on our Condensed Consolidated Balance Sheet. During the nine months ended December 31, 2023, we recognized a debt extinguishment gain of approximately $7.7, net of unamortized debt discount and debt issuance costs recorded within Interest and other, net in our Condensed Consolidated Statement of Operations. The purchase of a portion of our 2024 Notes was funded with proceeds received from the 2026 Notes and 2028 Notes.
Credit Agreement
On May 23, 2022, we entered into a new unsecured Credit Agreement (the "2022 Credit Agreement"). The 2022 Credit Agreement provides for an unsecured five-year revolving credit facility with commitments of $500.0, including sublimits for (i) the issuance of letters of credit in an aggregate face amount of up to $100.0 and (ii) borrowings and letters of credit denominated in Pounds Sterling, Euros, and Canadian Dollars in an aggregate principal amount of up to $100.0. In addition, the 2022 Credit Agreement contains uncommitted incremental capacity permitting the incurrence of up to an additional amount not to exceed the greater of $250.0 and 35.0% of the Company's Consolidated Adjusted EBITDA (as defined in the 2022 Credit Agreement).
Loans under the 2022 Credit Agreement will bear interest at a rate of (a) 0.000% to 0.625% above an alternate base rate (8.50% at December 31, 2023) or (b) 1.000% to 1.625% above Secured Overnight Financing Rate ("SOFR"), approximately 5.35% at December 31, 2023, which rates are determined by the Company's credit rating.
As of December 31, 2023, there were no borrowings under the 2022 Credit Agreement, and we had approximately $499.5 available for additional borrowings.
Convertible Notes
In conjunction with the acquisition of Zynga on May 23, 2022 (refer to Note 13 - Acquisitions), we entered into (a) the First Supplemental Indenture (the “2024 Supplemental Indenture”) to the Indenture, dated as of June 14, 2019 (the “2024 Indenture”), between Zynga and Computershare Trust Company, N.A. (as successor to Wells Fargo Bank, National Association) (the “Convertible Notes Trustee”), relating to Zynga’s 0.25% Convertible Senior Notes due 2024 (the “2024 Convertible Notes”), and (b) the First Supplemental Indenture (the “2026 Supplemental Indenture” and, together with the 2024 Supplemental Indenture, the “Supplemental Indentures”) to the Indenture, dated as of December 17, 2020 (the “2026 Indenture” and, together with the 2024 Indenture, the “Indentures”), between Zynga and the Convertible Notes Trustee, relating to Zynga’s 0.00% Convertible Senior Notes due 2026 (the “2026 Convertible Notes” and, together with the 2024 Convertible Notes, the “Convertible Notes”). As of the closing date of the acquisition, approximately $690.0 aggregate principal amount of the 2024
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Convertible Notes was outstanding and approximately $874.5 aggregate principal amount of the 2026 Convertible Notes was outstanding.
Following the acquisition and according to the Supplemental Indentures, we assumed all of Zynga’s rights and obligations under the Indentures, and the Company guaranteed the payment and other obligations of Zynga under the Convertible Notes. As a result of our acquisition of Zynga, the right to convert each one thousand dollar principal amount of such Convertible Notes into shares of Zynga common stock was changed into a right to convert such principal amount of such Convertible Notes into the number of units of Reference Property equal to the conversion rate in effect immediately prior to the closing of the Zynga Acquisition, in each case pursuant to the terms and procedures set forth in the applicable Indenture. A unit of Reference Property is defined in each Indenture as 0.0406 shares of Take-Two common stock and $3.50 in cash, without interest, plus cash in lieu of any fractional shares of Take-Two common stock.
The 2024 Convertible Notes and 2026 Convertible Notes mature on June 1, 2024, and December 15, 2026, respectively, unless earlier converted, redeemed, or repurchased in accordance with their terms, respectively, prior to the maturity date. Interest is payable semiannually on the 2024 Convertible Notes in arrears on March 1 and September 1 of each year. The 2026 Convertible Notes do not bear regular interest, and the principal amount does not accrete.
The acquisition of Zynga constituted a Fundamental Change, a Make-Whole Fundamental Change, and a Share Exchange Event (each as defined in the Indentures) under the Indentures. The effective date of the Fundamental Change, Make-Whole Fundamental Change and Share Exchange Event in respect of the Convertible Notes was May 23, 2022, and the related tender and conversion periods expired on June 22, 2022. As a result, each holder of Convertible Notes had the right to tender its Convertible Notes to the Company for cash or surrender its Convertible Notes for conversion into the Reference Property at the applicable conversion rate, in each case pursuant to the terms and procedures set forth in the applicable Indenture.
As of the expiration of the Fundamental Change, Make-Whole Fundamental Change, and Share Exchange Event, (a) $0.3 aggregate principal amount of the 2024 Convertible Notes and (b) $845.1 aggregate principal amount of the 2026 Convertible Notes were tendered for cash. In addition, (a) $668.3 aggregate principal amount of the 2024 Convertible Notes, and (b) no 2026 Convertible Notes were surrendered for conversion into the applicable Reference Property. In total, we paid $321.6 for the tendered or converted 2024 Convertible Notes, including interest, and $845.1 for the tendered 2026 Convertible Notes in cash, and we issued 3.7 shares of our common stock upon the conversion of the 2024 Convertible Notes. After settlement of all Convertible Notes tendered or surrendered for conversion, $21.4 aggregate principal amount of the 2024 Convertible Notes remained outstanding and $29.4 aggregate principal amount of the 2026 Convertible Notes remained outstanding at December 31, 2023.
Financial Condition
We are subject to credit risks, particularly if any of our receivables represent a limited number of customers or are concentrated in foreign markets. If we are unable to collect our accounts receivable as they become due, it could adversely affect our liquidity and working capital position.
Generally, we have been able to collect our accounts receivable in the ordinary course of business. We do not hold any collateral to secure payment from customers. We have trade credit insurance on the majority of our customers to mitigate accounts receivable risk.
A majority of our trade receivables are derived from sales to major retailers, including digital storefronts and platform partners, and distributors. Our five largest customers accounted for 79.2% and 79.7% of net revenue during the nine months ended December 31, 2023 and 2022, respectively. As of December 31, 2023 and March 31, 2023, five customers accounted for 67.4% and 61.1% of our gross accounts receivable, respectively. Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 53.4% and 50.3% of such balances at December 31, 2023 and March 31, 2023, respectively. We had three customers who accounted for 21.2%, 18.1%, and 14.2%, of our gross accounts receivable as of December 31, 2023, and three customers who accounted for 21.6%, 14.5%, and 14.2% of our gross accounts receivable as of March 31, 2023. We did not have any additional customers that exceeded 10% of our gross accounts receivable as of December 31, 2023, and March 31, 2023. Based upon performing ongoing credit evaluations, maintaining trade credit insurance on a majority of our customers who sell our physical products and our past collection experience, we believe that the receivable balances from these largest customers do not represent a significant credit risk, although we actively monitor each customer's creditworthiness and economic conditions that may affect our customers' business and access to capital. We are monitoring the current global economic conditions, including credit markets and other factors as they relate to our customers in order to manage the risk of uncollectible accounts receivable.
We believe that our current cash and cash equivalents, short-term investments, and projected cash flow from operations, along with availability under our 2022 Credit Agreement will provide us with sufficient liquidity to satisfy our cash requirements for working capital, capital expenditures, and commitments on both a short-term and long-term basis.
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As of December 31, 2023, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was $667.3. These balances are dispersed across various locations around the world. We believe that such dispersion meets the business and liquidity needs of our foreign affiliates. In addition, we expect to have the ability to generate sufficient cash domestically to support ongoing operations for the foreseeable future.
Our Board of Directors has authorized the repurchase of up to 21.7 shares of our common stock. Under this program, we may purchase shares from time to time through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. Repurchases are subject to the availability of stock, prevailing market conditions, the trading price of the stock, our financial performance, and other conditions. The program does not require us to repurchase shares and may be suspended or discontinued at any time for any reason.
During the three months ended December 31, 2023, we did not repurchase shares of our common stock in the open market, as part of the program. We have repurchased a total of 11.7 shares of our common stock under the program, and as of December 31, 2023, 10.0 shares of our common stock remained available for repurchase under the share repurchase program.
Our changes in cash flows were as follows:
| Nine Months Ended December 31, | |||||||||||
| (millions of dollars) | 2023 | 2022 | |||||||||
| Net cash (used in) provided by operating activities | $ | (7.2) | $ | 35.8 | |||||||
| Net cash provided by (used in) investing activities | 26.5 | (2,814.8) | |||||||||
| Net cash (used in) provided by financing activities | (72.0) | 1,904.6 | |||||||||
| Effects of foreign currency exchange rates on cash, cash equivalents, and restricted cash and cash equivalents | 7.9 | (18.6) | |||||||||
| Net change in cash, cash equivalents, and restricted cash and cash equivalents | $ | (44.8) | $ | (893.0) | |||||||
At December 31, 2023, we had $1,189.8 of cash and cash equivalents and restricted cash and cash equivalents, compared to $1,234.6 at March 31, 2023. The decrease was primarily due to Net cash used in financing activities, primarily related to net share settlements of our restricted stock awards and payment of contingent earn-outs for prior acquisitions, partially offset by issuance of common stock and our net debt activity. The debt activity included proceeds from the issuance of 2026 Notes and 2028 Notes offset by our partial repayment of 2024 Notes and repayment of our Term Loan (refer to Note 9 - Debt). The decrease was also due to Net cash used in operating activities which was due primarily to investments in software development and licenses, partially offset by sales of our products. These net decreases were partially offset by Net cash provided by investing activities primarily related to sales and maturities of available for sale securities, partially offset by our purchases of fixed assets.
Commitments
Capital Expenditures
In fiscal year 2024, we anticipate capital expenditures to be approximately $150.0. During the nine months ended December 31, 2023, capital expenditures were $95.5.
International Operations
Net revenue earned outside of the United States is principally generated by our operations in Europe, Asia, Australia, Canada, and Latin America. For the three months ended December 31, 2023 and 2022, 40.1% and 37.0%, respectively, of our net revenue was earned outside the United States. We are subject to risks inherent in foreign trade, including increased credit risks, tariffs and duties, fluctuations in foreign currency exchange rates, shipping delays and international political, regulatory and economic developments, all of which can have a significant effect on our operating results.
Fluctuations in Quarterly Operating Results and Seasonality
We have experienced fluctuations in quarterly and annual operating results as a result of the timing of the introduction of new titles, variations in sales of titles developed for particular platforms, market acceptance of our titles, development and promotional expenses relating to the introduction of new titles, sequels or enhancements of existing titles, projected and actual changes in platforms, the timing and success of title introductions by our competitors, product returns, changes in pricing policies by us and our competitors, the accuracy of retailers' forecasts of consumer demand, the size and timing of acquisitions, the timing of orders from major customers, and order cancellations and delays in product shipment. Sales of our full game
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products are also seasonal, with peak demand typically occurring in the fourth calendar quarter during the holiday season. For certain of our software products with multiple performance obligations, we defer the recognition of our net revenue over an estimated service period which generally ranges from six to fifteen months. As a result, the quarter in which we generate the highest Net Bookings may be different from the quarter in which we recognize the highest amount of Net revenue. Quarterly comparisons of operating results are not necessarily indicative of future operating results.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from fluctuations in market rates and prices. Our market risk exposures primarily include fluctuations in interest rates and foreign currency exchange rates.
Interest Rate Risk
Our exposure to fluctuations in interest rates relates primarily to our short-term investment portfolio and variable rate debt under the 2022 Credit Agreement.
We seek to manage our interest rate risk by maintaining a short-term investment portfolio that includes corporate bonds with high credit quality and maturities of less than two years. Since short-term investments mature relatively quickly and can be reinvested at the then-current market rates, interest income on a portfolio consisting of short-term securities is more subject to market fluctuations than a portfolio of longer-term maturities. However, the fair value of a short-term portfolio is less sensitive to market fluctuations than a portfolio of longer-term securities. We do not currently use derivative financial instruments in our short-term investment portfolio. Our investments are held for purposes other than trading.
As of December 31, 2023, we had $23.5 of short-term investments, which included $2.9 of available-for-sale securities. The available-for-sale securities were recorded at fair market value with unrealized gains or losses resulting from changes in fair value reported as a separate component of Accumulated other comprehensive loss, net of tax, in Stockholders' equity. We also had $898.7 of cash and cash equivalents that are comprised primarily of money market funds and bank-time deposits. We determined that, based on the composition of our investment portfolio, there was no material interest rate risk exposure to our Condensed Consolidated Financial Statements or liquidity as of December 31, 2023.
Historically, fluctuations in interest rates have not had a significant effect on our operating results.
Under our 2022 Credit Agreement, loans will bear interest at a rate of (a) 0.000% to 0.625% above an alternate base rate (8.50% at December 31, 2023) or (b) 1.000% to 1.625% above SOFR, approximately 5.35% at December 31, 2023, which rates are determined by the Company's credit rating. At December 31, 2023, there were no borrowings under the 2022 Credit Agreement.
Foreign Currency Exchange Rate Risk
We transact business in foreign currencies and are exposed to risks resulting from fluctuations in foreign currency exchange rates. In particular, during the six months ended September 30, 2023, there was a significant devaluation of the Turkish Lira against the U.S. Dollar, which negatively affected our results. It is possible that further devaluations could occur, which would have a negative impact on our results. Accounts relating to foreign operations are translated into U.S. dollars using prevailing exchange rates at the relevant period end. Translation adjustments are included as a separate component of Stockholders' equity on our Condensed Consolidated Balance Sheets. For the three months ended December 31, 2023 and 2022, our foreign currency translation adjustment was a gain of $66.3 and a gain of $100.7, respectively. For the three months ended December 31, 2023 and 2022, we recognized a foreign currency exchange transaction loss of $2.2 and a gain of $0.1, respectively, included in Interest and other, net in our Condensed Consolidated Statements of Operations. For the nine months ended December 31, 2023 and 2022, our foreign currency translation adjustment was a gain of $29.2 and a loss of $78.4, respectively. For the nine months ended December 31, 2023 and 2022, we recognized a foreign currency exchange transaction loss of $21.5 and a loss of $25.3, respectively, included in Interest and other, net in our Condensed Consolidated Statements of Operations.
Balance Sheet Hedging Activities
We use foreign currency forward contracts to mitigate foreign currency exchange rate risk associated with non-functional currency denominated cash balances and intercompany funding loans, non-functional currency denominated accounts receivable and non-functional currency denominated accounts payable. These transactions are not designated as hedging instruments and are accounted for as derivatives whereby the fair value of the contracts is reported as either assets or liabilities on our Condensed Consolidated Balance Sheets, and gains and losses resulting from changes in the fair value are reported in Interest and other, net, in our Condensed Consolidated Statements of Operations. We do not enter into derivative financial contracts for speculative or trading purposes. At December 31, 2023, we had $290.8 of forward contracts outstanding to sell foreign currencies in exchange for U.S. dollars and $48.8 of forward contracts outstanding to buy foreign currencies in
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exchange for U.S. dollars, all of which have maturities of less than one year. At March 31, 2023, we had $224.3 of forward contracts outstanding to sell foreign currencies in exchange for U.S. dollars and $51.2 of forward contracts outstanding to buy foreign currencies in exchange for U.S. dollars, all of which had maturities of less than one year. For the three months ended December 31, 2023 and 2022, we recorded a loss of $8.0 and a loss of $14.1, respectively. For the nine months ended December 31, 2023 and 2022, we recorded a loss of $0.6 and a loss of $16.7, respectively. As of December 31, 2023, the fair value of these outstanding forward contracts resulted in a loss of $0.1 and was included in Other assets, and, as of March 31, 2023, the fair value of outstanding forward contracts was a gain of $2.5 and was included in Accrued expenses and other current liabilities. The fair value of these outstanding forward contracts is estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period.
Our hedging programs are designed to reduce, but do not entirely eliminate, the effect of currency exchange rate movements. We believe that the counterparties to these foreign currency forward contracts are creditworthy multinational commercial banks and that the risk of counterparty nonperformance is not material. Notwithstanding our efforts to mitigate some foreign currency exchange rate risks, there can be no assurance that our hedging activities will adequately protect us against the risks associated with foreign currency fluctuations. For the three months ended December 31, 2023, 40.1% of our revenue was generated outside the United States. Using sensitivity analysis, a hypothetical 10% increase in the value of the U.S. dollar against all currencies would decrease revenues by 4.0%, while a hypothetical 10% decrease in the value of the U.S. dollar against all currencies would increase revenues by 4.0%. This sensitivity analysis assumes a parallel shift of all foreign currency exchange rates against the U.S. dollar; however, all foreign currency exchange rates do not always move in this manner, and actual results may differ materially. In our opinion, a substantial portion of this fluctuation would be offset by cost of revenue and operating expenses incurred in local currency.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of management, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act") were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2023, which were identified in connection with management's evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Inherent limitations to any system of disclosure controls and procedures include, but are not limited to, the possibility of human error and the circumvention or overriding of such controls by one or more persons. In addition, we have designed our system of controls based on certain assumptions, which we believe are reasonable, about the likelihood of future events, and our system of controls may therefore not achieve its desired objectives under all possible future events.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Note 11 - Commitments and Contingencies to our Condensed Consolidated Financial Statements for disclosures regarding legal proceedings.
Item 1A. Risk Factors
There have been no material changes to the Risk Factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Share Repurchase Program—Our Board of Directors previously authorized the repurchase of up to 21.7 shares of our common stock. The authorizations permit us to purchase shares from time to time through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. Repurchases are subject to the availability of stock, prevailing market conditions, the trading price of the stock, our financial performance and other conditions. The program may be suspended or discontinued at any time for any reason.
During the three months ended December 31, 2023, we did not repurchase any shares of our common stock in the open market, as part of the program. As of December 31, 2023, we had repurchased a total of 11.7 shares of our common stock under this program, and 10.0 shares of common stock remained available for repurchase under our share repurchase program. The table below details the share repurchases made by us during the three months ended December 31, 2023:
| Period | Shares purchased | Average price per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number of shares that may yet be purchased under the repurchase program | ||||||||||||||||||||||
| October 1-31, 2023 | — | $ | — | — | 10.0 | |||||||||||||||||||||
| November 1-30, 2023 | — | $ | — | — | 10.0 | |||||||||||||||||||||
| December 1-31, 2023 | — | $ | — | — | 10.0 | |||||||||||||||||||||
Item 5. Other Information
The share numbers and dollar amounts in this Item 5 represent the actual number of shares and dollars (not in millions).
Securities Trading Plans
Our Section 16 officers and directors, as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934 (the “Exchange Act”), may from time to time enter into plans for the purchase or sale of our common stock that are intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act. During the quarter ended December 31, 2023, the following Section 16 officers and directors adopted, modified, or terminated “Rule 10b5-1 trading arrangements” (as defined in Item 408 of Regulation S-K of the Exchange Act):
•On December 8, 2023 , ZelnickMedia Corporation (“ZelnickMedia”) and ZMC Advisors, L.P. (“ZMC Advisors” and, collectively with ZelnickMedia, “ZMC”) adopted a new written trading plan. Pursuant to our Management Agreement with ZMC, Strauss Zelnick , a partner of each of ZelnickMedia and ZMC Advisors, serves as our Executive Chairman and Chief Executive Officer , and Karl Slatoff, a partner of each of ZelnickMedia and ZMC Advisors, serves as our President.
◦With respect to sales by ZelnickMedia, the plan’s maximum duration is until April 26, 2024 and the first trade will not occur until April 12, 2024, at the earliest. The trading plan is intended to permit ZelnickMedia to sell 51% of vested shares of our common stock pursuant to certain Restricted Stock Units that will vest, or fail to vest, on April 12, 2024.
◦With respect to sales by ZMC Advisors, the plan’s maximum duration is until June 14, 2024 and the first trade will not occur until May 31, 2024, at the earliest. The trading plan is intended to permit ZMC Advisors to sell 51% of vested shares of our common stock pursuant to certain Restricted Stock Units that will vest, or fail to vest, on May 31, 2024.
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•On December 8, 2023 , Karl Slatoff , our President , adopted a new written trading plan. The plan’s maximum duration is until June 3, 2025 and the first trade will not occur until April 15, 2024, at the earliest. The trading plan is intended to permit Mr. Slatoff to make one or more share donations equal to the lesser of (i) up to an aggregate of 14,716 shares of our common stock and (ii) up to an aggregate of $2,500,000 worth of shares of our common stock.
•On December 8, 2023 , Daniel Emerson , our Executive Vice President and Chief Legal Officer , adopted a new written trading plan. The plan’s maximum duration is until December 31, 2024 and the first trade will not occur until June 3, 2024, at the earliest. The trading plan is intended to permit Mr. Emerson to sell up to an aggregate of 75% of net vested shares of our common stock pursuant to certain Restricted Stock Units that will vest, or fail to vest, on May 31, 2024.
No other Section 16 officers or directors, as defined in Rule 16a-1(f), adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as defined in Item 408 of Regulation S-K, during the three months ended December 31, 2023.
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Item 6. Exhibits
| Exhibits: | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101.INS | The Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document | ||||
| 101.LAB | Inline XBRL Taxonomy Label Linkbase Document | ||||
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document | ||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Document | ||||
________________________________________________________________________________________________________________________________
Attached as Exhibit 101 to this report are the following formatted in Inline XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at December 31, 2023 (Unaudited) and March 31, 2023, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2023 and 2022 (Unaudited), (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended December 31, 2023 and 2022 (Unaudited), (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2023 and 2022 (Unaudited), (v) Condensed Consolidated Statements of Equity for the three and nine months ended December 31, 2023 and 2022 (Unaudited); and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited).
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________________________________________________________________________________________________________________________________
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TAKE-TWO INTERACTIVE SOFTWARE, INC. (Registrant) | |||||||||||
| Date: | February 8, 2024 | By: | /s/ STRAUSS ZELNICK | ||||||||
Strauss Zelnick Chairman and Chief Executive Officer (Principal Executive Officer) | |||||||||||
| Date: | February 8, 2024 | By: | /s/ LAINIE GOLDSTEIN | ||||||||
Lainie Goldstein Chief Financial Officer (Principal Financial Officer) | |||||||||||
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Exhibit 31.1
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Section 302 Certification
I, Strauss Zelnick, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Take-Two Interactive Software, Inc. (the “registrant”);
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
February 8, 2024 | /s/ STRAUSS ZELNICK | ||||
Strauss Zelnick Chairman and Chief Executive Officer | |||||
Exhibit 31.2
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Section 302 Certification
I, Lainie Goldstein, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Take-Two Interactive Software, Inc. (the “registrant”);
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
February 8, 2024 | /s/ LAINIE GOLDSTEIN | |||||||
Lainie Goldstein Chief Financial Officer | ||||||||
EXHIBIT 32.1
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Take-Two Interactive Software, Inc. (the “Company”) on Form 10-Q for the period ended December 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Strauss Zelnick, as Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
February 8, 2024 | /s/ STRAUSS ZELNICK | ||||
Strauss Zelnick Chairman and Chief Executive Officer | |||||
EXHIBIT 32.2
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Take-Two Interactive Software, Inc. (the “Company”) on Form 10-Q for the period ended December 31, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lainie Goldstein, as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
February 8, 2024 | /s/ LAINIE GOLDSTEIN | ||||
Lainie Goldstein Chief Financial Officer | |||||